What changed in this filing

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Item 1. Financial Statements

2022-11-04 compared with 2022-08-03 · 288 added, 578 removed, 1218 unchanged (42% of the section changed)

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended June 30,

Nine Months Ended September 30,

(Dollars in Thousands) 2022 2021

1 unchanged sentence

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities

Provision for Credit Losses, including Provision for Unfunded Commitments 2,477 1,939

Provision for Credit Losses, including Provision (Recovery) for Unfunded Commitments 2,557 1,466

Origination of Loans Held-for-Sale ( 7,017 ) ( 465,174 )

7 unchanged sentences

Write-downs of Other Real Estate Owned 578 3,324

Gains on Sales of Other Real Estate Owned, Net ( 333 ) ( 396 )

(Gains) Losses on Sales of Other Real Estate Owned, Net ( 310 ) 99

(Gains) Losses on Sales and Write-downs of Bank Premises ( 342 ) 114

Commercial Loan Swap Derivative Income ( 443 ) ( 153 )

Change in Fair Market Value of Commercial Loan Swap Derivative ( 738 ) ( 188 )

Premiums on Branch Sales — ( 506 )

1 unchanged sentence

Recognition of Restricted Stock Compensation Expense 1,010 772

Increase in Other Assets ( 2,040 ) ( 10,678 )

Decrease in Other Assets 768 6,296

Decrease in Other Liabilities ( 702 ) ( 2,446 )

8 unchanged sentences

Proceeds from Sales of Bank Premises and Equipment, net 408 —

Redemption of Federal Home Loan Bank Stock, net 285 1,878

Proceeds from Sale of Portfolio Loans — 42,295

(Redemption) Purchases of Federal Home Loan Bank Stock, net ( 840 ) 1,878

Loan (Originations) and Payments, net ( 224,839 ) 9,458

5 unchanged sentences

Decrease in Certificates of Deposits ( 95,665 ) ( 218,235 )

Payments on Federal Home Loan Bank Borrowings, net ( 7,000 ) ( 5,000 )

Borrowings (Payments) on Federal Home Loan Bank Borrowings, net 23,000 ( 5,000 )

Repurchase of Common Stock ( 40,131 ) —

6 unchanged sentences

Cash Paid for Income Taxes 3,253 2,720

Transfer from Loans to Other Real Estate Owned — 23

Transfer from Fixed Assets to Other Real Estate Owned 1,584 12,013

1 unchanged sentence

Right-of-use Asset Recorded in Exchange for Lease Liabilities 3,391 2,027

Loans Transferred to Held-for-Sale $ 1,513 $ —

See accompanying notes to unaudited consolidated financial statements.

28 unchanged sentences

Allowance for Credit Losses Policy

The adoption of CECL accounting did not result in a significant change to any other credit risk management and monitoring process, including identification of past due or delinquent borrowers, nonaccrual practices, assessment of restructured loans or charge-off policy.

The Company’s methodology for estimating the ACL includes:

The adoption of current expected credit losses (“CECL”) accounting did not result in a significant change to any other credit risk management and monitoring process, including identification of past due or delinquent borrowers, nonaccrual practices, assessment of restructured loans or charge-off policy.

The Company’s methodology for estimating the allowance for credit losses (“ACL”) includes:

Segmentation.

8 unchanged sentences

NOTE 1 – BASIS OF PRESENTATION – (continued)

quantifiable.

Individually evaluated loans not specifically analyzed receive a quantitative and qualitative analysis, as described below.

43 unchanged sentences

loan to more affordable terms before their loan reaches nonaccrual status.

These modified terms that result in a direct change in the timing or amount of contractual cash flows have historically included interest only periods, extended amortization periods beyond what management would typically offer for a similar loan or a below market interest rate when compared to management's underwriting standards for a similar loan type.

These modified terms that result in a direct change in the timing or amount of contractual cash flows have historically included principal forgiveness, other-than-significant payment delays, interest only periods, extended term and amortization periods beyond what management would typically offer for a similar loan or a below market interest rate when compared to management's underwriting standards for a similar loan type, or any combination.

These concessions are intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral.

17 unchanged sentences

Congress passed, and the U.S.

President signed legislation that provides a uniform approach for replacing LIBOR as a reference rate in legacy contracts that do not contain effective “fall back” provisions for when LIBOR is no longer published or no longer representative, and that instructs the Federal Reserve to identify a replacement benchmark based on SOFR.

President signed, legislation that provides a uniform approach for replacing LIBOR as a reference rate in legacy contracts that do not contain effective “fall back” provisions for when LIBOR is no longer published or no longer representative, and that instructs the FRB to identify a replacement benchmark based on SOFR.

In response, we have created an internal team that is managing our transition away from LIBOR.

6 unchanged sentences

Our transition team is fully committed to working within the guidelines established by the FCA and ARRC to provide a smooth transition away from LIBOR.

As of June 30, 2022, approximately 14.3 % of our loan portfolio consists of loans whose variable rate index is LIBOR.

As of September 30, 2022, approximately 13.2 % of our loan portfolio consists of loans whose variable rate index is LIBOR.

We ceased originating new LIBOR based variable rate loans by December 31, 2021 per the ARRC’s guidance.

5 unchanged sentences

The following table reconciles the numerators and denominators of basic and diluted earnings per share calculations for the periods presented:

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

(Dollars in Thousands, except share and per share data) 2022 2021 2022 2021

12 unchanged sentences

The following tables present the amortized cost and fair value of available-for-sale securities as of the dates presented:

June 30, 2022

September 30, 2022

(Dollars in Thousands) Amortized

26 unchanged sentences

Total Debt Securities $ 920,246 $ 9,969 $ ( 7,815 ) $ 922,400

The Company did no t have securities classified as held-to-maturity at June 30, 2022 or December 31, 2021.

The Company did no t have securities classified as held-to-maturity at September 30, 2022 or December 31, 2021.

The following table shows the composition of gross and net realized gains and losses for the periods presented:

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

(Dollars in Thousands) 2022 2021 2022 2021

2 unchanged sentences

Gross Realized Losses ( 4 ) ( 10 ) ( 160 ) ( 95 )

Net Realized Gains 76 1,499 52 5,109

Net Realized (Losses) Gains ( 4 ) 1,341 48 6,450

Tax Impact $ ( 1 ) $ 282 $ 10 $ 1,355

Gains or losses are recognized in earnings on the trade date using the amortized cost of the specific security sold.

The net realized gains above reflect reclassification adjustments in the calculation of Other Comprehensive (Loss) Income.

The net realized gains are included in noninterest income as gains on sales of securities, net in the Consolidated Statements of Income.

The net realized (losses) gains above reflect reclassification adjustments in the calculation of Other Comprehensive Loss.

The net realized (losses) gains are included in noninterest income as (losses) gains on sales of securities, net in the Consolidated Statements of Income.

The tax impact is included in income tax provision in the Consolidated Statements of Income.

2 unchanged sentences

Securities not due at a single maturity date are shown separately.

June 30, 2022

September 30, 2022

(Dollars in Thousands) Amortized

8 unchanged sentences

Total Debt Securities $ 960,464 $ 851,211

At June 30, 2022 and December 31, 2021, there were no holdings of securities of any one issuer, other than those securities issued by or collateralized by the U.S.

At September 30, 2022 and December 31, 2021, there were no holdings of securities of any one issuer, other than those securities issued by or collateralized by the U.S.

Government and its Agencies, in an amount greater than 10% of shareholders’ equity.

The carrying value of securities pledged for various regulatory and legal requirements was $ 178.5 million at June 30, 2022 and $ 178.6 million at December 31, 2021.

The carrying value of securities pledged for various regulatory and legal requirements was $ 227.6 million at September 30, 2022 and $ 178.6 million at December 31, 2021.

CARTER BANKSHARES, INC.

1 unchanged sentence

NOTE 3 – INVESTMENT SECURITIES (continued)

Available-for-sale securities with unrealized losses at June 30, 2022 and December 31, 2021, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, were as follows:

June 30, 2022

Available-for-sale securities with unrealized losses at September 30, 2022 and December 31, 2021, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, were as follows:

September 30, 2022

Less Than 12 Months 12 Months or More Total

39 unchanged sentences

Total Debt Securities 178 $ 442,849 $ ( 6,228 ) 90 $ 85,381 $ ( 1,587 ) 268 $ 528,230 $ ( 7,815 )

The Company adopted Topic 326, Financial Instruments—Credit Losses (Topic 326) on January 1, 2021 and did not record an allowance for credit losses (“ACL”) on its investment securities during the quarter ended June 30, 2022 as the Company did no t have securities classified as held-to-maturity at June 30, 2022.

The Company adopted Topic 326, Financial Instruments—Credit Losses (Topic 326) on January 1, 2021 and did not record an ACL on its investment securities during the quarter or nine months ended September 30, 2022 as the Company did no t have securities classified as held-to-maturity at September 30, 2022.

The Company regularly reviews debt securities for expected credit loss using both qualitative and quantitative criteria, as necessary, based on the composition of the portfolio at period end.

As of June 30, 2022, management does not intend to sell any impaired security and it is not more than likely that it will be required to sell any impaired security before the recovery of its amortized cost basis.

As of September 30, 2022, management does not intend to sell any impaired security and it is not more than likely that it will be required to sell any impaired security before the recovery of its amortized cost basis.

The unrealized losses on debt securities are primarily the result of interest rate changes, credit spread fluctuations on agency-issued mortgage-related securities, general financial market uncertainty and unprecedented market volatility.

1 unchanged sentence

The fair value is expected to recover as the securities approach their maturity date or repricing date.

As of June 30, 2022, management believes the unrealized losses detailed in the table above are not related to credit and therefore no allowance for credit losses has been recognized on the Company’s securities.

Should the impairment of any of these securities become credit related, the cost basis of the investment will be reduced and the resulting loss will be recognized in net income in the period the credit related impairment is identified, while any noncredit loss will be recognized in other comprehensive income.

During the three and six months ended June 30, 2022 and 2021, the Company had no credit related net investment impairment losses.

As of September 30, 2022, management believes the unrealized losses detailed in the table above are not related to credit;

therefore, no ACL has been recognized on the Company’s securities.

Should the impairment of any of these securities become credit related, the cost basis of the investment will be reduced and the resulting loss will be recognized in net income in the period the credit related impairment is identified, while any non-credit loss will be recognized in other comprehensive loss.

During the three and nine months ended September 30, 2022 and 2021, the Company had no credit related net investment impairment losses.

CARTER BANKSHARES, INC.

3 unchanged sentences

(Dollars in Thousands)

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

Commercial Real Estate

19 unchanged sentences

Due to the removal of the TDR designation, the Company evaluates all loan restructurings according to the accounting guidance for loan modifications to determine if the restructuring results in a new loan or a continuation of the existing loan.

Loan modifications to borrowers experiencing financial difficulty that result in a direct change in the timing or amount of contractual cash flows include situations where there is principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions, and combinations of the above.

Therefore, the disclosures related to loan restructurings are only for modifications that directly affect cash flows.

5 unchanged sentences

NOTE 4 – LOANS AND LOANS HELD-FOR-SALE (continued)

The following table shows the amortized cost basis as of June 30, 2022 and December 31, 2021 for the loans restructured to borrowers experiencing financial difficulty, disaggregated by class of financing receivables:

The following table shows the amortized cost basis as of September 30, 2022 for the three and nine months ended September 30, 2022 for the loans restructured during the three and nine months ended September 30, 2022 to borrowers experiencing financial difficulty, disaggregated by class of financing receivables:

Restructured Loans

June 30, 2022 December 31, 2021

Three Months Ended September 30, 2022 Nine Months Ended September 30, 2022

(Dollars in Thousands) Number of Contracts Amortized Cost Basis (1)

18 unchanged sentences

Total Restructured Loans 1 $ 137 0.04 % 2 $ 463 0.03 %

(1) Excludes accrued interest receivable of $ 2.9 thousand at June 30, 2022 and $ 0.5 million at December 31, 2021.

(1) Excludes accrued interest receivable of $ 0.1 thousand and $ 0.9 thousand at September 30, 2022 for restructured loans during the the three and nine months ended September 30, 2022 .

During the third quarter of 2022 the Bank modified a construction loan as a restructured loan.

This nonperforming loan was extended to allow the borrower to complete construction.

In the first quarter of 2022 the Bank recognized a loan modification of a commercial real estate loan as a restructured loan.

The borrower’s objective was to redevelop the property for a purpose that temporarily lacks feasibility due to the COVID-19 pandemic.

In the interim the property is leased, albeit at a lower rate than originally forecasted.

The borrower’s objective was to redevelop the property for a purpose that temporarily lacked feasibility due to the COVID-19 pandemic.

In the interim the property was leased, albeit at a lower rate than originally forecasted.

The Bank reduced the regularly scheduled principal and interest payments to accommodate the rental income until the property can be redeveloped.

This loan is not considered significant and is included in the Bank’s ACL model in the general pool of the CRE segment for reserve purposes.

For the year ended December 31, 2021 the Bank modified six loans to borrowers experiencing financial difficulty.

Of these six accruing loans, five are related through common guarantors.

The Bank improved economic terms, improved collateral position via cross collateralization and actually shortened the maturity of these loans in connection with a global workout agreement.

Payment terms include interest only, there were no modifications to the original rate.

These loans are included in the Bank’s ACL model in the “Other” segment for reserve purposes.

In the third quarter of 2022 this loan was returned to accruing status due to sustainable payments over the last six months.

These loans are not considered significant and are included in the Bank’s ACL model in the general pool of the construction and commercial real estate (“CRE”) segments for reserve purposes.

CARTER BANKSHARES, INC.

1 unchanged sentence

NOTE 4 – LOANS AND LOANS HELD-FOR-SALE (continued)

The Company closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts.

The following table depicts the performance of loans that have been modified in the six months ended June 30, 2022:

The Bank closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts.

The following table depicts the performance of loans that have been modified in the nine months ended September 30, 2022:

Payment Status (Amortized Cost Basis)

16 unchanged sentences

$ 463 $ — $ —

(1) Excludes accrued interest receivable of $ 2.9 thousand at June 30, 2022.

As of June 30, 2022, the Company had no commitments to lend any additional funds on restructured loans.

As of June 30, 2022 the Company had no loans that defaulted during the period and had been modified preceding the payment default when the borrower was experiencing financial difficulty at the time of modification.

(1) Excludes accrued interest receivable of $ 0.9 thousand at September 30, 2022.

As of September 30, 2022, the Bank had no commitments to lend any additional funds on restructured loans.

As of September 30, 2022 the Bank had no loans that defaulted during the period and had been modified preceding the payment default when the borrower was experiencing financial difficulty at the time of modification.

For purposes of this disclosure, a default occurs when, within 12 months of the original modification, either a full or partial charge-off occurs or the loan becomes 90 days or more past due.

As of June 30, 2022 and December 31, 2021, the Company had $ 1.0 million and $ 0.3 million, respectively, of residential real estate loans in the process of foreclosure.

We also had $ 24.0 thousand at June 30, 2022 and $ 62.0 thousand at December 31, 2021 in residential real estate loans included in OREO.

As of September 30, 2022 and December 31, 2021, the Bank had $ 1.3 million and $ 0.3 million, respectively, of residential real estate loans in the process of foreclosure.

We also had $ 23.0 thousand at September 30, 2022 and $ 62.0 thousand at December 31, 2021 in residential real estate loans included in other real estate owned (“OREO”).

CARTER BANKSHARES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES

3 unchanged sentences

The Company’s loan portfolio is segmented by homogeneous loan types that behave similarly to economic cycles.

The segmentation in the current expected credit losses (“CECL”) model is different from the segmentation in the Incurred Loss model.

The segmentation in the CECL model is different from the segmentation in the Incurred Loss model.

The following is a discussion of the key risks by portfolio segment that management assesses in preparing the ACL.

6 unchanged sentences

Collateral for these types of loans often do not have sufficient value in a distressed or liquidation scenario to satisfy the outstanding debt.

These loans are also made to local and state municipalities for

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

various purposes including refinancing existing obligations, infrastructure up-fit and expansion, or to purchase new equipment.

These loans are also made to local and state municipalities for various purposes including refinancing existing obligations, infrastructure up-fit and expansion, or to purchase new equipment.

These loans may be secured by general obligations from the municipal authority or revenues generated by infrastructure and equipment financed by the Company.

20 unchanged sentences

The ACL reserve for the Other segment is based on a discounted cash flow methodology and reserves will fluctuate based on expected cash flow changes in the future.

These inconsistencies may include, but are not limited to i) transaction and/or relationship sizes that exceed limits established in 2018, ii) overreliance on secondary, tertiary or guarantor cash flow, iii) land acquisition loans without a defined source of amortization, and iv) loan structures on operating lines of credit dependent on the value of real estate rather than trading assets.

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

without a defined source of amortization, and iv) loan structures on operating lines of credit dependent on the value of real estate rather than trading assets.

Management continuously assesses underwriting standards, but significantly enhanced these standards in 2018.

8 unchanged sentences

These outcomes, known as “challenger models,” provide opportunities to examine and subjectively adjust the CECL model output and are designed to be counter cyclical, thereby reducing variability.

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

Credit Quality Indicators:

17 unchanged sentences

Substandard – Assets that are inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any.

Assets so classified have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt.

Assets so classified have a well-defined weakness, or weaknesses that jeopardize the

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

liquidation of the debt.

Such assets are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

9 unchanged sentences

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

The following table presents loan balances by year of origination and internally assigned risk rating for our portfolio segments as of the periods presented:

June 30, 2022

(Dollars in Thousands) 2022 2021 2020 2019 2018 2017 and Prior Revolving Total

The following table presents portfolio loan balances by year of origination and internally assigned risk rating for our portfolio segments as of the periods presented:

September 30, 2022

(Dollars in Thousands) 2022 2021 2020 2019 2018 2017 and Prior Revolving Total Portfolio Loans

Commercial Real Estate

43 unchanged sentences

December 31, 2021

(Dollars in Thousands) 2021 2020 2019 2018 2017 2016 and Prior Revolving Total

(Dollars in Thousands) 2021 2020 2019 2018 2017 2016 and Prior Revolving Total Portfolio Loans

Commercial Real Estate

42 unchanged sentences

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

The following table presents loan balances by year of origination and performing and nonperforming status for our portfolio segments as of the periods presented.

June 30, 2022

(Dollars in Thousands) 2022 2021 2020 2019 2018 2017 and Prior Revolving Total

The following table presents portfolio loan balances by year of origination and performing and nonperforming status for our portfolio segments as of the periods presented:

September 30, 2022

(Dollars in Thousands) 2022 2021 2020 2019 2018 2017 and Prior Revolving Total Portfolio Loans

Commercial Real Estate

28 unchanged sentences

December 31, 2021

(Dollars in Thousands) 2021 2020 2019 2018 2017 2016 and Prior Revolving Total

(Dollars in Thousands) 2021 2020 2019 2018 2017 2016 and Prior Revolving Total Portfolio Loans

Commercial Real Estate

25 unchanged sentences

The following tables include an aging analysis of the recorded investment of past due portfolio loans as the periods presented:

June 30, 2022

September 30, 2022

(Dollars in Thousands) Current

26 unchanged sentences

Total $ 2,803,062 $ 1,359 $ 311 $ 1,670 $ 7,397 $ 2,812,129

There were no loans past due 90 days or more and still accruing at June 30, 2022 and December 31, 2021.

There were no loans past due 90 days or more and still accruing at September 30, 2022 and December 31, 2021.

Loans past due 90 days are automatically transferred to nonaccrual status.

Loans past due 30 to 89 days or more and still accruing increased $ 0.9 million to $ 2.6 million at June 30, 2022 compared to $ 1.7 million at December 31, 2021.

There were no nonaccrual or past due loans related to loans held-for-sale at June 30, 2022 or December 31, 2021.

The following table presents loans on nonaccrual status and loans past due 90 days or more and still accruing by class of loan for the periods presented.

June 30, 2022

Loans past due 30 to 89 days and still accruing decreased $ 0.6 million to $ 1.1 million at September 30, 2022 compared to $ 1.7 million at December 31, 2021.

There were no nonaccrual or past due loans related to loans held-for-sale at September 30, 2022 or December 31, 2021.

The following table presents loans on nonaccrual status and loans past due 90 days or more and still accruing by loan segment for the periods presented:

September 30, 2022

(Dollars in Thousands) Beginning of

10 unchanged sentences

Total Portfolio Loans $ 7,397 $ 7,010 $ 1,212 $ —

As of and for the December 31, 2021

December 31, 2021

(Dollars in Thousands) Beginning of

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Loans experiencing financial difficulty with a commitment of $ 1.0 million or more are individually evaluated.

During the three and six months ended June 30, 2022 and the twelve months ended December 31, 2021, no material amount of interest income was recognized on individually evaluated loans subsequent to their classification as individually evaluated loans.

During the three and nine months ended September 30, 2022 and the twelve months ended December 31, 2021, no material amount of interest income was recognized on individually evaluated loans subsequent to their classification as individually evaluated loans.

CARTER BANKSHARES, INC.

2 unchanged sentences

The following table presents the amortized cost basis of collateral-dependent individually evaluated loans as of the periods presented.

Changes in the fair value of the types of collateral for individually evaluated loans are reported as provision for credit loss on loans or a reversal of the provision for credit loss on loans in the period of change.

Changes in the fair value of the types of collateral for individually evaluated loans are reported as provision (recovery) for credit loss on loans in the period of change.

Type of Collateral

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

(Dollars in Thousands) Real Estate Real Estate

6 unchanged sentences

The following tables present activity in the ACL for the periods presented:

Three Months Ended June 30, 2022

Three Months Ended September 30, 2022

(Dollars in Thousands) Commercial Real Estate Commercial and Industrial Residential Mortgage Other Consumer Construction Other Total Loans

1 unchanged sentence

Balance at Beginning of Period $ 17,808 $ 5,688 $ 5,155 $ 1,719 $ 6,832 $ 60,779 $ 97,981

Provision for Credit Losses on Loans 290 2,127 545 526 ( 722 ) ( 952 ) 1,814

(Recovery) Provision for Credit Losses on Loans ( 433 ) 1,542 466 206 1,856 ( 3,714 ) ( 77 )

Charge-offs — ( 3,432 ) — ( 418 ) — — ( 3,850 )

2 unchanged sentences

Balance at End of Period $ 17,375 $ 3,798 $ 5,622 $ 1,616 $ 8,688 $ 57,065 $ 94,164

Six Months Ended June 30, 2022

Nine Months Ended September 30, 2022

(Dollars in Thousands) Commercial Real Estate Commercial and Industrial Residential Mortgage Other Consumer Construction Other Total Loans

1 unchanged sentence

Balance at Beginning of Period $ 17,297 $ 4,111 $ 4,368 $ 1,493 $ 6,939 $ 61,731 $ 95,939

Provision for Credit Losses on Loans 511 1,598 714 829 ( 256 ) ( 952 ) 2,444

Provision (Recovery) for Credit Losses on Loans 78 3,118 1,202 1,035 1,600 ( 4,666 ) 2,367

Charge-offs — ( 3,432 ) ( 45 ) ( 1,244 ) — — ( 4,721 )

5 unchanged sentences

NOTE 5 – ALLOWANCE FOR CREDIT LOSSES (continued)

Three Months Ended June 30, 2021

Three Months Ended September 30, 2021

(Dollars in Thousands) Commercial Real Estate Commercial and Industrial Residential Mortgage Other Consumer Construction Other Total Loans

1 unchanged sentence

Balance at Beginning of Period $ 28,141 $ 4,714 $ 5,367 $ 1,221 $ 8,145 $ 61,731 $ 109,319

Provision for Credit Losses on Loans ( 6,103 ) ( 185 ) 217 269 1,039 5,730 967

(Recovery) Provision for Credit Losses on Loans ( 304 ) 4 266 410 ( 789 ) — ( 413 )

Charge-offs ( 9,187 ) ( 188 ) ( 56 ) ( 424 ) — — ( 9,855 )

2 unchanged sentences

Balance at End of Period $ 18,659 $ 4,533 $ 5,578 $ 1,405 $ 7,388 $ 61,731 $ 99,294

Six Months Ended June 30, 2021

Nine Months Ended September 30, 2021

(Dollars in Thousands) Commercial Real Estate Commercial and Industrial Residential Mortgage Other Consumer Construction Other Total Loans

2 unchanged sentences

Impact of CECL Adoption 6,587 1,379 3,356 ( 877 ) ( 80 ) 51,277 $ 61,642

Provision for Credit Losses on Loans ( 6,776 ) ( 1,723 ) ( 38 ) 747 160 10,454 2,824

(Recovery) Provision for Credit Losses on Loans ( 7,080 ) ( 1,719 ) 228 1,157 ( 629 ) 10,454 2,411

Charge-offs ( 17,425 ) ( 196 ) ( 273 ) ( 1,833 ) — — ( 19,727 )

7 unchanged sentences

NOTE 6 – FAIR VALUE MEASUREMENTS

We use fair value measurements when recording and disclosing certain financial assets and liabilities.

The Company uses fair value measurements when recording and disclosing certain financial assets and liabilities.

Securities available-for-sale and derivative financial instruments are recorded at fair value on a recurring basis.

14 unchanged sentences

We recognize transfers between any of the fair value hierarchy levels at the end of the reporting period in which the transfer occurred.

The following are descriptions of the valuation methodologies that we use for financial instruments recorded at fair value on either a recurring or nonrecurring basis.

The following are descriptions of the valuation methodologies that the Company uses for financial instruments recorded at fair value on either a recurring or nonrecurring basis.

Recurring Basis

49 unchanged sentences

OREO and other repossessed assets marked to fair value are classified as Level 3.

At June 30, 2022 OREO assets were in compliance with the OREO policy as set forth above, and substantially all of the assets were listed for sale with credible third-party real estate brokers.

At September 30, 2022 OREO assets were in compliance with the OREO policy as set forth above, and substantially all of the assets were listed for sale with credible third-party real estate brokers.

CARTER BANKSHARES, INC.

2 unchanged sentences

Financial assets measured at fair value on a recurring basis are summarized below for the periods presented:

June 30, 2022

September 30, 2022

(Dollars in Thousands) Carrying

46 unchanged sentences

We have invested in subordinated debt of other financial institutions.

We have three securities totaling $ 11.0 million that are considered to be Level 3 securities at June 30, 2022 and two totaling $ 8.6 million at December 31, 2021.

The change in the fair value of Level 3 securities available-for-sale from $ 8.6 million at December 31, 2021 to $ 11.0 million at June 30, 2022 is attributable to a change in the fair value level of an existing security in the amount of $ 2.9 million, offset by the change in calculated fair value of $ 0.4 million.

The existing security was previously valued by an independent third party based upon a trade desktop evaluation, but is now performed internally using the same approach applied to the other Level 3 securities.

We have two securities totaling $ 7.3 million that are considered to be Level 3 securities at September 30, 2022 and two totaling $ 8.6 million at December 31, 2021.

The change in the fair value of Level 3 securities available-for-sale from $ 8.6 million at December 31, 2021 to $ 7.3 million at September 30, 2022 is attributable to a change in the fair value of $ 1.3 million.

The Level 3 fair value is benchmarked to other securities that have observable market values in Level 2 using comparable financial ratio analysis specific to the industry in which the underlying company operates.

The underwriting includes considerations of capital adequacy, asset quality trends,

CARTER BANKSHARES, INC.

1 unchanged sentence

NOTE 6 – FAIR VALUE MEASUREMENTS (continued)

Level 3 fair value is benchmarked to other securities that have observable market values in Level 2 using comparable financial ratio analysis specific to the industry in which the underlying company operates.

The underwriting includes considerations of capital adequacy, asset quality trends, management’s ability to continue efficient and profitable operations, the institution’s core earnings ability, liquidity management platform and current on and off-balance sheet interest rate risk exposures.

management’s ability to continue efficient and profitable operations, the institution’s core earnings ability, liquidity management platform and current on and off-balance sheet interest rate risk exposures.

Financial assets measured at fair value on a nonrecurring basis are summarized below for the periods presented:

June 30, 2022

September 30, 2022

(Dollars in Thousands) Level 1 Level 2 Level 3 Fair Value

5 unchanged sentences

Individually Evaluated Loans $ — $ — $ 1,777 $ 1,777

Individually evaluated loans had a net carrying amount of $ 4.1 million at June 30, 2022 with a valuation allowance of $ 3.5 million.

Individually evaluated loans had a net carrying amount of $ 1.8 million at September 30, 2022 with a valuation allowance of $ 0.3 million.

Individually evaluated loans had a net carrying amount of $ 1.8 million at December 31, 2021 with a valuation allowance of $ 1.0 million.

OREO, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $ 8.4 million as of June 30, 2022, compared with $ 10.9 million at December 31, 2021.

We had $ 0.4 million write-downs recorded on OREO for the six months ended June 30, 2022 and $ 3.2 million for the same period in 2021.

OREO, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $ 8.1 million as of September 30, 2022, compared with $ 10.9 million at December 31, 2021.

We had $ 0.6 million of write-downs recorded on OREO for the nine months ended September 30, 2022 and $ 3.3 million for the same period in 2021.

The following table summarizes the Company’s assets that were measured at fair value on a nonrecurring basis for the periods presented:

June 30, 2022

September 30, 2022

(Dollars in Thousands) Fair

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Range Average

Individually Evaluated Loans $ 1,777 Discounted Appraisals Management's Discount & Estimated Selling Costs 53.0 % 53.0 %

Individually Evaluated Loans 2,367 Estimated Enterprise Value Pending Sales agreements from Potential Buyers 8.3 % 8.3 %

Individually Evaluated Loans $ 1,791 Discounted Appraisals Estimated Selling Costs 6.0 % 6.0 %

Total Individually Evaluated Loans $ 1,791

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Total OREO $ 10,916

A baseline discount rate has been established for impairment measurement.

This baseline discount rate was back tested against historical OREO sales;

therefore it represents an average recovery rate based on the transaction sizes and asset types in the population examined.

Management considers the unique attributes and characteristics of each specific individually evaluated loan and may use judgment to adjust the baseline discount rate when appropriate.

CARTER BANKSHARES, INC.

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NOTE 6 – FAIR VALUE MEASUREMENTS (continued)

A baseline discount rate has been established for impairment measurement.

This baseline discount rate was back tested against historical OREO sales and therefore represents an average recovery rate based on the transaction sizes and asset types in the population examined.

Management considers the unique attributes and characteristics of each specific individually evaluated loan and may use judgement to adjust the baseline discount rate when appropriate.

The carrying values and estimated fair values of our financial instruments at June 30, 2022 and December 31, 2021 are presented in the following tables.

Fair values for June 30, 2022 and December 31, 2021 are estimated under the exit price notion in accordance with ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.”

The carrying values and estimated fair values of our financial instruments at September 30, 2022 and December 31, 2021 are presented in the following tables.

Fair values for September 30, 2022 and December 31, 2021 are estimated under the exit price notion in accordance with ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.”

GAAP requires disclosure of fair value information about financial instruments carried at book value on the Consolidated Balance Sheet.

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Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

Fair Value Measurements at June 30, 2022

Fair Value Measurements at September 30, 2022

(Dollars in Thousands) Carrying Value Level 1 Level 2 Level 3 Total

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(Included in Other Assets)

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

(Dollars in Thousands) Number of Transactions Notional Amount Fair Value Number of Transactions Notional Amount Fair Value

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(Included in Other Liabilities)

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

(Dollars in Thousands) Number of Transactions Notional Amount Fair Value Number of Transactions Notional Amount Fair Value

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NOTE 7 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES – (continued)

The following table indicates the income (loss) recognized on derivatives for the periods presented:

Three Months Ended June 30, Six Months Ended June 30,

The following table indicates the income recognized on derivatives for the periods presented:

Three Months Ended September 30, Nine Months Ended September 30,

(Dollars in Thousands) 2022 2021 2022 2021

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Interest Rate Swap Contracts – Commercial Loans 295 35 738 188

Total Derivative Income (Loss) $ 139 $ ( 276 ) $ 443 $ 153

Total Derivative Income $ 295 $ 35 $ 738 $ 188

Presenting offsetting derivatives that are subject to legally enforceable netting arrangements with the same party is permitted.

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(Included in Other Liabilities)

(Dollars in Thousands) June 30,

(Dollars in Thousands) September 30,

2022 December 31,

2021 June 30,

2021 September 30,

2022 December 31,

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Borrowings serve as an additional source of liquidity for the Company.

The Company had no Federal Home Loan Bank (“FHLB”) borrowings at June 30, 2022 and $ 7.0 million at December 31, 2021.

The Company had $ 30.0 million Federal Home Loan Bank (“FHLB”) borrowings at September 30, 2022 and $ 7.0 million at December 31, 2021.

FHLB borrowings are fixed rate advances for various terms and are secured by a blanket lien on select residential mortgages, select multifamily loans, and select commercial real estate loans.

Total loans pledged as collateral were $ 1.2 billion at June 30, 2022 and $ 1.1 billion at December 31, 2021.

There were no securities available-for-sale pledged as collateral at both June 30, 2022 and December 31, 2021.

Total loans pledged as collateral were $ 1.4 billion at September 30, 2022 and $ 1.1 billion at December 31, 2021.

There were no securities available-for-sale pledged as collateral at both September 30, 2022 and December 31, 2021.

The Company continues to methodically pledge additional eligible loans and expect continued progress in additional pledging throughout the year.

The Company is eligible to borrow up to an additional $ 773.6 million based upon current qualifying collateral and has a maximum borrowing capacity of approximately $ 1.0 billion, or 25.0 % of the Company’s assets, as of June 30, 2022.

The Company is eligible to borrow up to an additional $ 807.8 million based upon current qualifying collateral and has a maximum borrowing capacity of approximately $ 1.0 billion, or 25.0 % of the Company’s assets, as of September 30, 2022.

The Company had the capacity to borrow up to an additional $ 667.3 million from the FHLB at December 31, 2021.

The following table represents the balance of long-term borrowings and the weighted average interest rate as of the periods presented:

(Dollars in Thousands) June 30, 2022 December 31, 2021

Long-term Borrowings $ — $ 7,000

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 – FEDERAL HOME LOAN BANK BORROWINGS – (continued)

The following table represents the balance of FHLB borrowings and the weighted average interest rate as of the periods presented:

(Dollars in Thousands) September 30, 2022 December 31, 2021

FHLB Borrowings $ 30,000 $ 7,000

Weighted Average Interest Rate 3.13 % 1.61 %

During the year ended December 31, 2021 the Company prepaid four FHLB advances totaling $ 28.0 million with a weighted average cost to borrow of 1.0 %.

S cheduled annual maturities and weighted average interest rates for FHLB borrowings for each of the five years subsequent to September 30, 2022 and thereafter are as follows :

(Dollars in Thousands) Balance Weighted

1 year $ 30,000 3.13 %

2 years — — %

3 years — — %

4 years — — %

5 years — — %

Thereafter — — %

Total FHLB Borrowings $ 30,000 3.13 %

During the year ended December 31, 2021 the Company repaid four FHLB advances totaling $ 28.0 million with a weighted average cost to borrow of 1.0 %.

One FHLB advance totaling $ 3.0 million was repaid at maturity in the fourth quarter of 2021.

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The FHLB borrowing of $ 7.0 million was prepaid in January 2022 outside of its scheduled maturity and had unamortized prepayment fees related to the early repayment of the borrowing of $ 18 thousand.

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 – COMMITMENTS AND CONTINGENCIES

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The Company provides lines of credit to our clients to finance the completion of construction projects and revolving lines of credit to operating companies to finance their working capital needs.

Lines of credit for construction projects represented 61.3 % and 55.3 %, of the commitments to extend credit at June 30, 2022 and December 31, 2021, respectively.

Lines of credit for construction projects represented 62.7 % and 55.3 %, of the commitments to extend credit at September 30, 2022 and December 31, 2021, respectively.

Standby letters of credit are conditional commitments issued by the Company guaranteeing the performance of a customer to a third-party.

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The following table sets forth our commitments and letters of credit as of the dates presented:

(Dollars in Thousands) June 30, 2022 December 31, 2021

(Dollars in Thousands) September 30, 2022 December 31, 2021

Commitments to Extend Credit $ 525,086 $ 513,482

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The life-of-loan reserve for unfunded commitments is included in other liabilities on our Consolidated Balance Sheets.

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 – COMMITMENTS AND CONTINGENCIES – (continued)

The following table presents activity in the life-of-loss reserve on unfunded loan commitments as of the dates presented:

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

(Dollars in Thousands) 2022 2021 2022 2021

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Total $ 1,973 $ 2,107 $ 1,973 $ 2,107

Amounts are added to the provision for unfunded commitments through a charge to current earnings in the provision for unfunded commitments.

An expense of $ 0.3 million was recorded during the period for the provision for unfunded commitments, which resulted in an increase of $ 0.9 million for both the three and six months ended June 30, 2022 compared to the release of $ 0.6 million and $ 0.9 million for the same periods in 2021.

Amounts are added or subtracted to the provision (recovery) for unfunded commitments through a charge or credit to current earnings in the provision (recovery) for unfunded commitments.

An expense of $ 0.2 million was recorded during the three and nine month periods for the provision (recovery) for unfunded commitments, which resulted in an increase of $ 0.2 million and $ 1.1 million for the three and nine months ended September 30, 2022 compared to recoveries for the same periods in 2021.

In the normal course of business, the Company is subject to various legal and administrative proceedings and claims.

Legal and administrative proceedings are subject to inherent uncertainties and unfavorable rulings could occur, and the timing and outcome of any legal or administrative proceeding cannot be predicted with certainty.

CARTER BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – TAX EFFECTS ON OTHER COMPREHENSIVE (LOSS) I NCOME

The following table presents the change in components of other comprehensive (loss) income for the periods presented, net of tax effects:

(Dollars in Thousands) Three Months Ended June 30, 2022 Three Months Ended June 30, 2021

Pre-Tax Amount Tax Benefit Net of Tax Amount Pre-Tax Amount Tax (Expense) Benefit Net of Tax Amount

Net Unrealized (Losses) Gains Arising during the period $ ( 35,002 ) $ 7,350 $ ( 27,652 ) $ 8,456 $ ( 1,776 ) $ 6,680

Reclassification Adjustment for Gains included in Net Income ( 76 ) 16 ( 60 ) ( 1,499 ) 315 ( 1,184 )

Other Comprehensive (Loss) Income $ ( 35,078 ) $ 7,366 $ ( 27,712 ) $ 6,957 $ ( 1,461 ) $ 5,496

(Dollars in Thousands) Six Months Ended June 30, 2022 Six Months Ended June 30, 2021

NOTE 10 – TAX EFFECTS ON OTHER COMPREHENSIVE LOSS

The following table presents the change in components of other comprehensive loss for the periods presented, net of tax effects:

(Dollars in Thousands) Three Months Ended September 30, 2022 Three Months Ended September 30, 2021

Pre-Tax Amount Tax Benefit (Expense) Net of Tax Amount Pre-Tax Amount Tax Benefit Net of Tax Amount

Net Unrealized Losses Arising during the period $ ( 33,326 ) $ 6,999 $ ( 26,327 ) $ ( 4,588 ) $ 963 $ ( 3,625 )

Reclassification Adjustment for Losses (Gains) included in Net Income 4 ( 1 ) 3 ( 1,341 ) 282 ( 1,059 )

Other Comprehensive Loss $ ( 33,322 ) $ 6,998 $ ( 26,324 ) $ ( 5,929 ) $ 1,245 $ ( 4,684 )

(Dollars in Thousands) Nine Months Ended September 30, 2022 Nine Months Ended September 30, 2021

Pre-Tax Amount Tax Benefit Net of Tax Amount Pre-Tax Amount Tax Benefit Net of Tax Amount

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On June 28, 2022, the Company announced that the Board of Directors (“Board”) authorized a common stock repurchase program to purchase an additional 750,000 shares of its common stock in open market transactions, at prices that are accretive to continuing shareholders in the aggregate over a period of 12 months, subject to the non-objection letter from the Federal Reserve Bank of Richmond, which was received on July 26, 2022.

On December 13, 2021, the Company announced that its Board authorized, effective December 10, 2021, a common stock repurchase program to purchase up to 2,000,000 shares of the Company’s common stock in the aggregate over a period of twelve months .

During the six months ended June 30, 2022, 1,969,593 shares of common stock had been repurchased under this program at a total cost of $ 32.4 million, or an average price of $ 16.46 per share.

During the three months ended September 30, 2022, 464,208 shares of common stock had been repurchased under this program at a total cost of $ 7.7 million, or an average price of $ 16.62 per share.

twelve months .

Through April 28, 2022, when this repurchase program was fully executed, 1,969,593 shares of common stock had been repurchased under this program at a total cost of $ 32.4 million, or an average price of $ 16.46 per share.

During the year ended December 31, 2021 the Company repurchased 30,407 shares of common stock at a total cost of $ 0.5 million, or an average price of $ 15.22 per share.

As of April 28, 2022, the repurchase program to purchase up to 2,000,000 shares of the Company’s common stock was fully executed.

The specific timing, price and quantity of repurchases will be at the Company’s discretion and will depend on a variety of factors, including general market conditions, the trading price of common stock, legal and contractual requirements, applicable securities laws and the Company’s financial performance.

The repurchase plan does not obligate the Company to repurchase any particular number of shares.

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), is intended to help the reader understand our operations, our present business environment, and our consolidated results of operations and financial condition and highlights material changes in our financial condition and results of operations as of and for the three and six month periods ended June 30, 2022 and June 30, 2021.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), is intended to help the reader understand our operations, our present business environment, and our consolidated results of operations and financial condition and highlights material changes in our financial condition and results of operations as of and for the three and nine month periods ended September 30, 2022 and September 30, 2021.

The MD&A is provided as a supplement to, and should be read in conjunction with our Consolidated Financial Statements and the accompanying notes thereto contained in Item 1 of this Quarterly Report on Form 10-Q.

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Important Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains or incorporates statements that we believe are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

This Quarterly Report on Form 10-Q contains or incorporates certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements include statements that relate to our financial condition, market conditions, results of operations, plans, objectives, outlook for earnings, revenues, expenses, capital and liquidity levels and ratios, asset levels and asset quality.

Forward looking statements are typically identified by words or phrases such as “will likely result,” “expect,” “anticipate,” “estimate,” “forecast,” “project,” “intend,” “ believe,” “assume,” “strategy,” “trend,” “plan,” “outlook,” “outcome,” “continue,” “remain,” “potential,” “opportunity,” “comfortable,” “current,” “position,” “maintain,” “sustain,” “seek,” “achieve” and variations of such words and similar expressions, or future or conditional verbs such as will, would, should, could or may.

Forward-looking statements in this Quarterly Report on Form 10-Q may include, but are not limited to, statements related to current and future market conditions and interest rates, the COVID-19 pandemic and its potential additional impact on the Company, its markets and its customers, potential asset quality and net interest income developments, and the Company’s efficiency initiatives, and may otherwise relate to our financial condition, results of operations, plans, objectives, outlook for earnings, revenues, expenses, capital and liquidity levels and ratios, asset levels, asset quality, and other matters regarding or affecting the Company and its future business and operations.

Although we believe the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate and the forward-looking statements based on these assumptions could be incorrect.

The matters discussed in these forward-looking statements are subject to various risks, uncertainties and other factors that could cause actual results and trends to differ materially from those made, projected, or implied in or by the forward-looking statements depending on a variety of uncertainties or other factors including, but not limited to:

• changes in accounting policies, practices, or guidance, including for example, our adoption of Current Expected Credit Loss (“CECL”);

• general economic or business conditions, or changes in interest rates;

• technological risks and developments;

• cyber-security threats, attacks or events;

• the Company’s liquidity and capital positions;

• the potential adverse effects of unusual and infrequently occurring events, or the prospect of these events, such as weather-related disasters, terrorist acts, war and other military conflicts (such as the ongoing war between Russia and

The matters discussed in these forward-looking statements are subject to various risks, uncertainties and other factors that could

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (continued)

Ukraine) or public health events (such as the current COVID-19 pandemic), and the governmental and societal responses thereto;

• these potential adverse effects may include, without limitation, adverse effects on:

(1) the ability of the Company's borrowers to satisfy their obligations to the Company;

(2) the value of collateral securing loans;

(3) the demand for the Company's loans or its other products and services;

(4) incidents of cyberattacks and fraud;

(4) the Company’s results of operations, liquidity or capital resources;

(5) risks posed by reliance on third-party service providers;

(6) other aspects of the Company's business operations;

and (7) on financial markets and economic growth;

• the effect of steps the Company takes or has taken in response to the COVID-19 pandemic, the severity and duration of the COVID-19 pandemic, and the impact it has on exacerbating many of the risks described herein and in our Annual Report on Form 10-K for the year ended December 31, 2021 ;

• potential claims, damages, and fines related to litigation or government actions;

• sensitivity to the interest rate environment including a prolonged period of low interest rates, a rapid increase in interest rates or a change in the shape of the yield curve;

• the replacement of LIBOR;

cause actual results and trends to differ materially from those made, projected, or implied in or by the forward-looking statements including, but not limited to the effects of:

• market interest rates and the impacts of market interest rates on economic conditions, customer behavior, and the Company’s loan and securities portfolios;

• monetary and fiscal policies of the U.S.

government, including policies of the Federal Reserve;

• changes in accounting policies, practices, or guidance, for example, our adoption of CECL, including potential volatility in the Company’s operating results due to application of the CECL methodology;

• cyber-security threats, attacks or events;

rapid technological developments and changes;

• changes in the Company’s liquidity and capital positions;

• concentrations of loans secured by real estate, particularly commercial real estate, and the potential impacts of changes in market conditions on the value of real estate collateral;

• an insufficient ACL;

• the potential adverse effects of unusual and infrequently occurring events, such as weather-related disasters, terrorist acts, war and other military conflicts (such as the ongoing war between Russia and Ukraine) or public health events (such as the COVID-19 pandemic), and of any governmental and societal responses thereto;

these potential adverse effects may include, without limitation, adverse effects on the ability of the Company's borrowers to satisfy their obligations to the Company, on the value of collateral securing loans, on the demand for the Company's loans or its other products and services, on incidents of cyberattack and fraud, on the Company’s liquidity or capital positions, on risks posed by reliance on third-party service providers, on other aspects of the Company's business operations and on financial markets and economic growth;

• a change in spreads on interest-earning assets and interest-bearing liabilities;

• regulatory supervision and oversight, including the failure to comply with state and federal banking agency laws and regulations;

• legislative and regulatory changes and requirements affecting the financial services industry as a whole, and the Company, in particular;

• regulatory supervision and oversight;

• legislation affecting the financial services industry as a whole, and the Company and the Bank, in particular;

• the outcome of pending and future litigation and governmental proceedings;

• increased competition;

• the ability to continue to introduce competitive new products and services at competitive prices and on a timely, cost-effective basis;

• the Company's ability to recruit and retain qualified employees and implement adequate succession planning to mitigate the loss of key members of its senior management team;

• the Company’s strategic branch network optimization plan;

• increasing price and product/service competition;

• the ability to continue to introduce competitive new products and services on a timely, cost-effective basis;

managing our internal growth and acquisitions;

• the possibility that the anticipated benefits from acquisitions cannot be fully realized in a timely manner or at all, or that integrating the acquired operations will be more difficult, disruptive or more costly than anticipated;

• containing costs and expenses;

• material increases in costs and expenses;

• reliance on significant customer relationships;

• credit losses;

• the potential impact of climate change and related government regulation on the Company and its customers;

• general economic or business conditions, including unemployment levels, continuing supply chain disruptions and slowdowns in economic growth;

• expansions or consolidations in the Company’s branch network, including that the anticipated benefits of the Company’s branch network optimization project are not fully realized in a timely manner or at all;

• deterioration of the housing market and reduced demand for mortgages;

• deterioration in the overall macroeconomic conditions or the state of the banking industry that could impact the re-emergence of turbulence in significant portions of the global financial and real estate markets that could impact our performance directly by affecting our revenues and the value of our assets and liabilities, and indirectly by affecting the economy generally and access to capital in the amounts, at the times and on the terms required to support our future businesses.

• re-emergence of turbulence in significant portions of the global financial and real estate markets that could impact our performance, both directly, by affecting our revenues and the value of our assets and liabilities, and indirectly, by affecting the economy generally and access to capital in the amounts, at the times and on the terms required to support our future businesses.

Many of these factors, as well as other factors, are described in this Quarterly Report, as well as in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 and our subsequent filings with the Securities and Exchange Commission (“SEC”).

Forward-looking statements are based on beliefs and assumptions using information available at the time the statements are made.

We caution you not to unduly rely on forward-looking statements because the assumptions, beliefs, expectations and projections about future events that are expressed in or implied by a forward-looking statement may, and often do, differ materially from actual results.

Any forward-looking statement speaks only as to the date on which it is made, and we undertake no obligation to update, revise or clarify any forward-looking statement to reflect developments occurring after the statement is made.

We caution you not to unduly rely on forward-looking statements

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – (continued)

because the assumptions, beliefs, expectations and projections about future events that are expressed in or implied by a forward-looking statement may, and often do, differ materially from actual results.

Explanation of Use of Non-GAAP Financial Measures

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Management believes this measure provides information useful to investors in understanding our underlying business, operational performance and performance trends as it facilitates comparisons with the performance of other companies in the financial services industry.

The Company believes the presentation of net interest income on an FTE basis ensures the comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice.

Net interest income on an FTE basis (non-GAAP) is reconciled to net interest income (GAAP) in the Net Interest Income section under the heading "Results of Operations and Financial Condition."

The Company believes the presentation of net interest income and net interest margin on an FTE basis ensures the comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice.

Interest income (GAAP) per the Consolidated Statements of Income is reconciled to net interest income adjusted on an FTE basis and net interest margin adjusted on an FTE basis in the "Results of Operations and Financial Condition - Net Interest Income" section of this MD&A.

Although management believes that this non-GAAP financial measure enhances investors’ understanding of our business and performance, this non-GAAP financial measure should not be considered an alternative to GAAP or considered to be more relevant than financial results determined in accordance with GAAP, nor is it necessarily comparable with similar non-GAAP measures which may be presented by other companies.

Critical Accounting Estimates

Our critical accounting estimates involving significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of June 30, 2022 have remained unchanged from the disclosures presented under the heading “Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2021 under the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and are incorporated herein by reference.

Our critical accounting estimates involving significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of September 30, 2022 have remained unchanged from the disclosures presented under the heading “Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2021 under the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and are incorporated herein by reference.

Carter Bankshares, Inc.

(the “Company”) is a bank holding company headquartered in Martinsville, Virginia with assets of $4.1 billion at June 30, 2022.

(the “Company”) is a bank holding company headquartered in Martinsville, Virginia with assets of $4.1 billion at September 30, 2022.

The Company is the parent company of its wholly owned subsidiary, Carter Bank & Trust (the “Bank”).

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Earnings Summary

Highlights for the Three Months Ended June 30, 2022

• Net interest income increased $5.3 million, or 19.3%, to $32.5 million for the three months ended June 30, 2022 compared to $27.2 million for the same period in 2021 primarily due an increase of 34 basis points in earning assets due to the rising interest rate environment and a reduction of 21 basis points in funding costs;

• The provision for credit losses increased to $1.8 million for the three months ended June 30, 2022, compared to $1.0 million for the same period in 2021;

• Total noninterest income decreased $1.6 million to $5.6 million for the three months ended June 30, 2022 compared to the same period in 2021 due primarily to a reduction in gains on sales of securities;

• Total noninterest expense decreased $4.3 million to $23.4 million for the three months ended June 30, 2022 compared to the same period in 2021;

• Provision for income taxes increased $0.9 million to $1.8 million for the three months ended June 30, 2022 compared to $0.9 million for the same period in 2021.

Highlights for the Six Months Ended June 30, 2022

• Net interest income increased $6.9 million, or 12.9%, to $60.7 million for the six months ended June 30, 2022 compared to the same period in 2021 due primarily to the ongoing reduction in funding costs;

• The provision for credit losses decreased to $2.4 million for the six months ended June 30, 2022, compared to $2.8 million for the same period in 2021;

• Total noninterest income decreased $5.3 million to $10.9 million for the six months ended June 30, 2022 compared to $16.2 million for the same period in 2021 due primarily to a reduction in gains on sales of securities;

• Total noninterest expense decreased $5.4 million to $45.9 million for the six months ended June 30, 2022 compared the same period in 2021 resulting from our retail branch optimization project, higher profit sharing and reversals of vacation carryover in the first quarter of 2022 as well as lower medical costs in the first half of 2022;

• Provision for income taxes increased $1.3 million to $3.1 million for the six months ended June 30, 2022 compared to $1.8 million for the same period in 2021.

Balance Sheet Highlights (period-end balances, June 30, 2022 compared to December 31, 2021)

Highlights for the Three Months Ended September 30, 2022

• Net interest income increased $8.3 million, or 28.3%, to $37.7 million for the three months ended September 30, 2022 compared to $29.4 million for the same period in 2021 primarily due an increase of 69 basis points in the yield on earning assets due to the rising interest rate environment offset by a reduction of 13 basis points in funding costs;

• The recovery for credit losses was $(0.1) million for the three months ended September 30, 2022, compared to $(0.4) million for the same period in 2021;

• Total noninterest income decreased $1.7 million to $5.2 million for the three months ended September 30, 2022 compared to the same period in 2021 due primarily to a reduction in gains on sales of securities;

• Total noninterest expense decreased $1.2 million to $23.5 million for the three months ended September 30, 2022 compared to the same period in 2021;

• Provision for income taxes increased $4.1 million to $5.0 million for the three months ended September 30, 2022 compared to $0.9 million for the same period in 2021.

Highlights for the Nine Months Ended September 30, 2022

• Net interest income increased $15.3 million, or 18.4%, to $98.4 million for the nine months ended September 30, 2022 compared to the same period in 2021 primarily due an increase of 33 basis points in the yield on earning assets due to the rising interest rate environment offset by a reduction of 20 basis points in funding costs;

• The provision for credit losses remained relatively consistent at $2.4 million for the nine months ended September 30, 2022, compared to the same period in 2021;

• Total noninterest income decreased $6.9 million to $16.2 million for the nine months ended September 30, 2022 compared to $23.1 million for the same period in 2021 due primarily to a reduction in gains on sales of securities;

• Total noninterest expense decreased $6.7 million to $69.4 million for the nine months ended September 30, 2022 compared the same period in 2021 primarily resulting from our retail branch optimization project and the reversal of tax credit amortization due to an in-service date extension to 2023;

• Provision for income taxes increased $5.4 million to $8.1 million for the nine months ended September 30, 2022 compared to $2.7 million for the same period in 2021.

Balance Sheet Highlights (period-end balances, September 30, 2022 compared to December 31, 2021)

• The securities portfolio decreased $71.2 million and is currently 20.7% of total assets compared to 22.3% of total assets.

The decrease is due to the Company’s strategy of redeploying securities maturities into higher yielding loan growth.

• Total portfolio loans increased $185.8 million, or 13.3% on an annualized basis, primarily due to higher loan growth in the first half of 2022;

The decrease is due to the Company’s strategy of redeploying securities maturities into higher yielding loan growth and the continued decline in fair value due to rising market interest rates;

• Total portfolio loans increased $219.2 million, or 10.4%, on an annualized basis, primarily due to higher loan growth in the first nine months of 2022;

• The portfolio loans to deposit ratio was 81.4%, compared to 76.0%, as loan growth outpaced deposit growth;

• Total deposits increased $54.9 million to $3.8 billion at June 30, 2022 compared to December 31, 2021;

• Total deposits increased $27.5 million to $3.7 billion at September 30, 2022 compared to December 31, 2021;

• The ACL to total portfolio loans ratio was 3.11% compared to 3.41%.

The ACL on portfolio loans totaled $98.0 million at June 30, 2022, compared to $95.9 million with the increase driven primarily by the deterioration of one purchased syndicated C&I loan which resulted in a $2.6 million specific reserve and loan growth partially offset by a decline in the other segment due to principal pay downs;

The ACL on portfolio loans totaled $94.2 million at September 30, 2022, compared to $95.9 million with the decrease driven by a purchased syndicated C&I loan that was charged-down by $3.4 million, of which $2.6 million was previously reserved, loan growth and increased qualitative reserves, offset by declines in the other segment due to principal pay-downs;

CARTER BANKSHARES, INC.

1 unchanged sentence

• During the second quarter of 2022, the Company’s Board of Directors authorized an additional common share repurchase program to purchase up to 750,000 shares of the Company’s common stock, subject to the Federal Reserve’s non-objection letter, which was received on July 26, 2022.

We reported net income of $10.8 million or $0.44 diluted earnings per share for the three months ended June 30, 2022 and $20.1 million, or $0.80 diluted earnings per share, for the six months ended June 30, 2022 compared to net income of $5.4 million, or $0.21 diluted earnings per share and $14.8 million, or $0.56 diluted earnings per share, for the same periods in 2021.

Three Months Ended June 30, Six Months Ended June 30,

Since this date the Company repurchased 464,208 shares at an average price of $16.62 per share.

The Company reported net income of $14.4 million or $0.59 diluted earnings per share for the three months ended September 30, 2022 and $34.5 million, or $1.38 diluted earnings per share, for the nine months ended September 30, 2022 compared to net income of $11.2 million, or $0.42 diluted earnings per share and $26.0 million, or $0.98 diluted earnings per share, for the same periods in 2021.

Three Months Ended September 30, Nine Months Ended September 30,

PERFORMANCE RATIOS 2022 2021 2022 2021

13 unchanged sentences

Refer to the “Explanation of Use of Non-GAAP Financial Measures” above for additional discussion regarding the non-GAAP measures used in this Quarterly Report on Form 10-Q.

Total net interest income increased $5.3 million, or 19.3% to $32.5 million and $6.9 million, or 12.9%, to $60.7 million for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021.

Total net interest income increased $8.3 million, or 28.3% to $37.7 million and $15.3 million, or 18.4%, to $98.4 million for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021.

These increases were primarily due to the increase in yield on loans and securities due to the rising interest rate environment and ongoing reduction in funding costs.

Net interest income, on an FTE basis (non-GAAP), increased $5.2 million, or 18.7%, to $32.8 million and $6.7 million, or 12.3% to $61.3 million for the three and six months ended June 30, 2022, respectively, compared to $27.6 million and $54.6 million for the same periods in 2021.

The increases in net interest income, on an FTE basis (non-GAAP), were driven by higher interest income of $3.8 million and $3.3 million in the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021, offset by lower interest expense of $1.4 million and $3.4 million in the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021.

Net interest margin increased 49 basis points to 3.24% and 32 basis points to 3.06% for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021.

Net interest margin, on an FTE basis (non-GAAP), increased 48 basis points to 3.27% and 31 basis points to 3.09% for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021.

The Company continues to focus on the expansion of net interest income and the net interest margin.

The second quarter and first six months of 2022 was positively impacted by an increase in the yield on loans and investment securities due to the rising interest rate environment as well as the continued decline in funding costs.

The second quarter and first six months of 2022 was also positively impacted by the collection of fees and enhanced pricing on loans related to one large credit relationship.

Net interest income, on an FTE basis (non-GAAP), increased $8.3 million, or 27.8%, to $38.0 million and $15.0 million, or 17.7% to $99.3 million for the three and nine months ended September 30, 2022, respectively, compared to $29.7 million and $84.3 million for the same periods in 2021.

The increases in net interest income, on an FTE basis (non-GAAP), were driven by higher interest income of $7.4 million and $10.7 million in the three and nine months ended September 30, 2022, respectively, when compared to the same periods in 2021, offset by lower interest expense of $0.9 million and $4.3 million in the three and nine months ended September 30, 2022, respectively, when compared to the same periods in 2021.

Net interest margin increased 80 basis points to 3.72% and 48 basis points to 3.28% for the three and nine months ended September 30, 2022, respectively, when compared to the same periods in 2021.

Net interest margin, on an FTE basis (non-GAAP), increased 79 basis points to 3.75% and 47 basis points to 3.31% for the three and nine months ended September 30, 2022, respectively, when compared to the same periods in 2021.

The Company continues to focus on the expansion of net interest income and net interest margin.

The third quarter and first nine months of 2022 were positively impacted by an increase in the yield on loans and investment securities due to the rising interest rate environment as well as the continued decline in funding costs.

The three and first nine months of 2022 were also positively impacted by the collection of fees and enhanced pricing on loans related to one large credit relationship.

Certain of these loans may not be renewed at maturity and/or may not otherwise impact the net interest income and net interest margin as significantly in future periods.

In addition, rising market interest rates may begin to increase the Company’s funding costs in future periods.

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

The following table reconciles interest income and net interest income per the Consolidated Statements of Income to interest income on an FTE basis, net interest income on an FTE basis, and net interest margin to net interest margin on an FTE basis (non-GAAP), for the periods presented:

Three Months Ended June 30, Six Months Ended June 30,

The following table reconciles interest income and net interest income per the Consolidated Statements of Income to interest income on an FTE basis, net interest income on an FTE basis, and net interest margin on an FTE basis (non-GAAP), for the periods presented:

Three Months Ended September 30, Nine Months Ended September 30,

(Dollars in Thousands) 2022 2021 2022 2021

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The following table provides information regarding the average balances, interest and rates earned on interest-earning assets and the average balances, interest and rates paid on interest-bearing liabilities for the periods presented:

Three Months Ended June 30, 2022 Three Months Ended June 30, 2021

Three Months Ended September 30, 2022 Three Months Ended September 30, 2021

(Dollars in Thousands) Average Balance Income/ Expense Rate Average Balance Income/ Expense Rate

35 unchanged sentences

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

Six Months Ended June 30, 2022 Six Months Ended Six Months Ended June 30, 2021

Nine Months Ended September 30, 2022 Nine Months Ended September 30, 2021

(Dollars in Thousands) Average

36 unchanged sentences

(2) Tax-exempt income is on an FTE basis (non-GAAP) using the statutory federal corporate income tax rate of 21 percent.

Interest income increased $3.9 million, or 11.7% and $3.6 million, or 5.4%, for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021.

Interest income, on an FTE basis (non-GAAP), increased $3.8 million, or 11.3% and $3.3 million, or 5.0% for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021.

The change was primarily due to increases in average interest-earning assets of $48.0 million and $41.3 million in the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021, and higher interest rate yields on interest-earning assets of 34 basis points and 13 basis points for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021 due to the rising interest rate environment in fiscal year 2022.

For the three and six months ended June 30, 2022 compared to the same periods in 2021, average interest-bearing deposits with banks decreased $160.2 million and $97.8 million, respectively, and the average rate earned increased 68 and 17 basis points, respectively, as funds were deployed into higher yielding loans and securities.

Average loan balances decreased $1.8 million and $78.2 million for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021 due to large commercial paydowns in 2021.

Average Paycheck Protection Program (“PPP”) loans totaled $0.4 million as of June 30, 2022 compared to $29.8 million as of June 30, 2021 which contributed to the decline in average loan balances, as a result of the continued forgiveness on PPP loans processed by the Small Business Administration.

The average rate earned on loans increased 33 and 21 basis points for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021 primarily due to increased short-term interest rates during the first half of 2022.

At June 30, 2022, the loan portfolio was comprised of 29.6% floating rate loans which reprice monthly, 39.5% variable rate loans that reprice at least once during the life of the loan and 30.9% fixed rate loans that do not reprice during the life of the loan.

Average investment securities increased $210.9 million and $219.1 million for the three and six months ended June 30, 2022,

Interest income increased $7.4 million, or 21.2% and $11.0 million, or 10.9%, for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021.

Interest income, on an FTE basis (non-GAAP), increased $7.4 million, or 20.9% and $10.7 million, or 10.5% for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021.

The change was primarily due to increases in average interest-earning assets of $36.5 million and $39.7 million in the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021, and higher interest rate yields on interest-earning assets of 69 basis points and 33 basis points for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021 due to the rising interest rate environment in fiscal year 2022.

For the three and nine months ended September 30, 2022 compared to the same periods in 2021, average interest-bearing deposits with banks decreased $165.9 million and $120.7 million, respectively, and the average rate earned increased 195 and 40 basis points, respectively, as funds were deployed into higher yielding loans and securities.

Average loan balances increased $94.6 million for the three months ended September 30, 2022 and decreased $20.0 million for the nine months ended September 30, 2022 when compared to the same periods in 2021.

Loan growth during the three months ended September 30, 2022 was the primary influence for the quarterly increase, offset by large commercial paydowns in the first nine months of 2022 and 2021 and the decline in average Paycheck Protection Program (“PPP”) loans, due to the continued forgiveness by the Small Business Administration, which contributed to the decline for the nine months ended September 30, 2022.

The average rate earned on loans increased 52 and 32 basis points for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021 primarily due to increased short-term interest rates during 2022.

At September 30, 2022, the loan portfolio was comprised of 28.9% floating rate loans which reprice monthly, 39.9% variable rate loans that reprice at least once during the life of the loan and 31.2% fixed rate loans that do not reprice during the life of the loan.

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

respectively, compared to the same periods in 2021 and the average rate earned on investment securities increased 15 basis points for the three months ended June 30, 2022 and decreased two basis points for the six months ended June 30, 2022, when compared to the same periods in 2021.

The change in investment securities is the result of active balance sheet management to deploy excess cash.

Our portfolio has been diversified as to bond types, maturities, and interest rate structures.

As of June 30, 2022, the securities portfolio was comprised of 47.4% variable rate securities with approximately 47.1% that will reprice at least once over the next 12 months.

Average investment securities increased $108.8 million and $181.9 million for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021.

The average rate earned on investment securities increased 77 basis points and 24 basis points for the three and nine months ended September 30, 2022 compared to the same periods in 2021.

The change in investment securities is the result of active balance sheet management to deploy excess cash combined with the continued decline in fair value.

The portfolio has been diversified as to bond types, maturities, and interest rate structures.

As of September 30, 2022, the securities portfolio was comprised of 48.0% variable rate securities with approximately 46.4% that will reprice at least once over the next 12 months.

Having a significant percentage of variable rate securities is an important strategy during times of rising interest rates.

2 unchanged sentences

This variable rate structure is expected to limit the impact of rising rates on the Company’s unrealized losses on debt securities.

Interest expense decreased $1.4 million and $3.4 million for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021.

The decrease was primarily due to the intentional runoff of higher cost CDs in 2021 and the first half of 2022.

Interest expense on deposits decreased $1.3 million and $3.2 million for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021 primarily due to the decline in the average balance of CDs and the reduction in average rates paid on CDs.

The average balances on CDs decreased $242.4 million or 16.0% and $276.9 million, or 17.7% for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021 primarily due to the aforementioned intentional runoff of these higher cost CDs.

The average balances on our core deposits including money market accounts, interest-bearing demand accounts and savings accounts all increased by $176.4 million, $83.5 million and $77.6 million, respectively, for the three months ended June 30, 2022, and by $188.5 million, $84.3 million and $69.3 million, respectively, for the six months ended June 30, 2022, when compared to the same periods in 2021.

The average rates paid on these core deposit accounts remained relatively unchanged except the average rate paid on money market accounts, which decreased 11 and 12 basis points for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021.

The average balances on borrowings decreased $17.7 million and $24.0 million for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021 due to prepayments and scheduled maturities.

As a result, the cost of interest-bearing liabilities decreased 21 and 24 basis points for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021.

Interest expense decreased $0.9 million and $4.3 million for the three and nine months ended September 30, 2022, respectively, when compared to the same periods in 2021.

The decrease was primarily due to the intentional runoff of higher cost CDs in 2021 and the first nine months of 2022.

Interest expense on deposits decreased $0.9 million and $4.2 million for the three and nine months ended September 30, 2022, respectively, when compared to the same periods in 2021 primarily due to the decline in the average balance of CDs and the reduction in average rates paid on CDs.

The average balances on CDs decreased $177.8 million or 12.4% and $243.5 million, or 16.0% for the three and nine months ended September 30, 2022, respectively, when compared to the same periods in 2021 primarily due to the aforementioned intentional runoff of these higher cost CDs.

The average balances on our interest bearing core deposits, including money market accounts, interest-bearing demand accounts and savings accounts all increased by $131.8 million, $75.8 million and $63.5 million, respectively, for the three months ended September 30, 2022, and by $169.4 million, $81.4 million and $67.4 million, respectively, for the nine months ended September 30, 2022, when compared to the same periods in 2021.

The average rates paid on interest-bearing demand accounts increased 11 and six basis points for the three and nine months ended September 30, 2022 and the average rate paid on money market accounts decreased one and seven basis points for the three and nine months ended September 30, 2022, respectively, when compared to the same periods in 2021.

The average rates paid on savings accounts for both the three and nine months ended September 30, 2022 remained relatively unchanged.

The average balances on borrowings decreased $19.8 million and $22.6 million for the three and nine months ended September 30, 2022, respectively, when compared to the same periods in 2021 due to prepayments and scheduled maturities.

As a result, the cost of interest-bearing liabilities decreased 13 and 20 basis points for the three and nine months ended September 30, 2022, respectively, when compared to the same periods in 2021.

CARTER BANKSHARES, INC.

1 unchanged sentence

The following table sets forth for the periods presented a summary of the changes in interest earned and interest paid resulting from changes in volume and changes in rates:

Three Months Ended June 30, 2022

Compared to June 30, 2021 Six Months Ended June 30, 2022

Compared to June 30, 2021

Three Months Ended September 30, 2022

Compared to September 30, 2021 Nine Months Ended September 30, 2022

Compared to September 30, 2021

(Dollars in Thousands) Volume (3)

29 unchanged sentences

(3) Changes to rate/volume are allocated to both rate and volume on a proportionate dollar basis.

Provision for Credit Losses

The Company recognizes provision expense for the allowance for credit losses (“ACL”) based on the difference between the existing balance of ACL reserves and the ACL reserve balance necessary to adequately absorb expected credit losses associated with the Company’s financial instruments.

Similarly, the Company recognizes provision expense for unfunded commitments based on the difference between the existing balance of reserves for unfunded commitments and the reserve balance for unfunded commitments necessary to adequately absorb expected credit losses associated with those commitments.

Provision (Recovery) for Credit Losses

The Company recognizes (recovery) provision for the allowance for credit losses (“ACL”) based on the difference between the existing balance of ACL reserves and the ACL reserve balance necessary to adequately absorb expected credit losses associated with the Company’s financial instruments.

Similarly, the Company recognizes provision (recovery) expense for unfunded commitments based on the difference between the existing balance of reserves for unfunded commitments and the reserve balance for unfunded commitments necessary to adequately absorb expected credit losses associated with those commitments.

The Company adopted ASU 2016-03 on January 1, 2021, and increased the ACL by $64.5 million for the Day 1 adjustment which included $61.6 million to the ACL and $2.9 million related to the life-of-loss reserve on unfunded loan commitments.

The ACL was 3.27% of total portfolio loans at June 30, 2022, compared to 3.41% of total portfolio loans, at December 31, 2021.

The provision for credit losses increased $0.8 million to $1.8 million for the three months ended June 30, 2022 and decreased $0.4 million to $2.4 million for the six months ended June 30, 2022, when compared to the same periods in 2021.

The increase for the three months ended June 30, 2022 was primarily driven by loan growth, the deterioration of one purchased syndicated C&I loan which resulted in a $2.6 million specific reserve and partially offset by a decline in the other segment due to $15.4 million principal pay-downs.

These increases were partially offset by downward pressure on the challenger model’s long-term averages.

The provision for unfunded commitments increased $0.9 million for both the three and six months ended June 30, 2022 compared to the same periods in 2021 due to increased commitment volume in construction, partially offset by a decrease in the reserve rates.

The ACL was 3.11% of total portfolio loans at September 30, 2022, compared to 3.41% of total portfolio loans, at December 31, 2021.

The provision for credit losses increased $0.3 million to $(0.1) million for the three months ended September 30, 2022 and remained relatively unchanged at $2.4 million for the nine months ended September 30, 2022, when compared to the same periods in 2021.

The increase for the three months ended September 30, 2022 was primarily driven by loan growth, increased qualitative reserves of $3.0 million and a $4.9 million purchased syndicated C&I loan that was charged-down $3.4 million, of which $2.6 million was previously reserved, and then transferred to held-for-sale for $1.5 million, offset by the release of $3.7 million of reserves that were allocated to the other segment due to principal pay-downs.

The increase in qualitative reserves were factors attributable to the residential mortgage and commercial construction portfolios.

Project costs continue to escalate due to supply chain and labor disruptions as well as increased material costs.

Absent material cost increases, supply chain and labor disruptions cause the overall construction duration to increase, increasing interest costs to the borrower.

The bank has observed a handful of significant cost overruns on CRE projects.

To date, these cost overruns have either been funded by the borrower and/or project sponsors or partially funded by the Bank within acceptable underwriting

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

The Company continues to monitor these trends by diligently collecting data on commercial construction projects and analyzing risk presented to the Company’s loan portfolio.

The provision (recovery) for unfunded commitments increased $0.2 million and $1.1 million for the three and nine months ended September 30, 2022, respectively compared to the same periods in 2021 due to a decline in the reserve rates.

Refer to Note 5, Allowance for Credit Losses, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information related to our ACL.

Noninterest Income

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

(Dollars in Thousands) 2022 2021 $ Change % Change 2022 2021 $ Change % Change

Gains on Sales of Securities, net $ 76 $ 1,499 $ (1,423) (94.9) % $ 52 $ 5,109 $ (5,057) (99.0) %

(Losses) Gains on Sales of Securities, net $ (4) $ 1,341 $ (1,345) (100.3) % $ 48 $ 6,450 $ (6,402) (99.3) %

Service Charges, Commissions and Fees 1,750 1,660 90 5.4 % 5,452 4,958 494 10.0 %

7 unchanged sentences

Total Noninterest Income $ 5,235 $ 6,915 $ (1,680) (24.3) % $ 16,174 $ 23,105 $ (6,931) (30.0) %

Total noninterest income decreased $1.6 million, or 22.6%, to $5.6 million for the three months ended June 30, 2022 and decreased $5.3 million, or 32.4%, to $10.9 million for the six months ended June 30, 2022 when compared to the same periods in 2021.

These decreases were primarily related to declines in net security gains of $1.4 million and $5.1 million in the three and six months ended June 30, 2022, respectively.

Total noninterest income decreased $1.7 million, or 24.3%, to $5.2 million for the three months ended September 30, 2022 and decreased $6.9 million, or 30.0%, to $16.2 million for the nine months ended September 30, 2022 when compared to the same periods in 2021.

These decreases were primarily related to declines in net security gains of $1.3 million and $6.4 million in the three and nine months ended September 30, 2022, respectively.

The decline in security gains was due to the rising interest rate environment resulting in lower securities prices in the market that discouraged sales.

Changes in total noninterest income for the three months ended June 30, 2022 also included a decrease of $0.6 million in other noninterest income offset by increases of $0.3 million in services charges, commissions and fees and $0.2 million in insurance commissions.

The decrease in other noninterest income for the three months ended June 30, 2022 when compared to the same period in 2021 was also related to a premium of $0.5 million on the sale of four bank branches in the second quarter of 2021.

The increase in service charges, commission and fees for the three months ended June 30, 2022 when compared to the same period in 2021 was primarily due to the seasonality of certain fees in the second quarter of 2022 and the higher insurance commissions was due to increased customer activity.

Changes in total noninterest income for the six months ended June 30, 2022 also included decreases of $0.9 million in other noninterest income and $0.2 million in commercial loan swap fee income offset by increases of $0.4 million in service charges, commissions and fees, $0.3 million in gains on sales and write-downs of bank premises, net, and $0.2 million in insurance commissions.

Similar to the decline during the three month period ended June 30, 2022, the decline in other noninterest income for the six months ended June 30, 2022 was similarly related to premiums on the sale of bank branches;

however, the decline in commercial loan swap fee income was related to the timing and demand for this product in the current rising interest rate environment.

The increases in service charges, commissions and fees and insurance commission for the six months ended June 30, 2022 compared to the same period in 2021 was driven by seasonality and increased customer activity.

The $0.3 million gains on sales and write-downs of bank premises, net for the six months ended June 30, 2022 was due to a $0.4 million eminent domain settlement on a previously closed branch in the first quarter of 2022.

Changes in total noninterest income for the three months ended September 30, 2022 also included a decrease of $1.1 million in commercial loan swap fee income related to the timing and demand for this product in the current rising interest rate environment.

Offsetting the decreases were increases of $0.4 million in insurance commissions due to increases in insurance provider income and an increase of $0.2 million in other noninterest income related to an increase in fair value due to our interest rate swap contracts with commercial customers in the third quarter of 2022.

Also contributing to the offsetting decrease was was a $0.1 million increase in service charges on deposit accounts primarily driven by volume.

Along with the $6.4 million decline in net security gains previously mentioned for the nine months ended September 30, 2022, the Company also experienced declines of $1.3 million in commercial loan swap fee income and $0.7 million in other noninterest income.

Partially offsetting these decreases were the following increases, $0.6 million in insurance commissions, $0.5 million in service charges, commissions and fees, $0.3 million in gains on sales and write-downs of bank premises, net, and $0.1 million in debit card interchange fees.

Similar fluctuations as the three-month period ended September 30, 2022, the decline in other noninterest income for the nine month period ended September 30, 2022 related to premiums on the sale of bank branches.

The increases related to debit card interchange fees were driven by higher customer activity and the $0.3 million gains on sales and write-downs of bank premises, net was due to a $0.4 million eminent domain settlement on a previously closed branch in the first quarter of 2022.

CARTER BANKSHARES, INC.

1 unchanged sentence

Noninterest Expense

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

(Dollars in Thousands) 2022 2021 $ Change % Change 2022 2021 $ Change % Change

7 unchanged sentences

Data Processing 833 1,018 (185) (18.2) % 2,516 2,893 (377) (13.0) %

(Gains) Losses on Sales and Write-downs of Other Real Estate Owned, net (60) 2,603 (2,663) (102.3) % 99 2,815 (2,716) (96.5) %

Losses on Sales and Write-downs of Other Real Estate Owned, net 169 608 (439) (72.2) % 268 3,423 (3,155) (92.2) %

Losses on Sales and Write-downs on Bank Premises, net — 7 (7) (100.0) % — 114 (114) (100.0) %

4 unchanged sentences

Total Noninterest Expense $ 23,463 $ 24,685 $ (1,222) (5.0) % $ 69,384 $ 76,049 $ (6,665) (8.8) %

Total noninterest expense decreased $4.3 million and $5.4 million for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021.

The primary driver for both these decreases was $2.7 million for losses on sales and write-downs of OREO, net.

Total noninterest expense decreased $1.2 million and $6.7 million for the three and nine months ended September 30, 2022, respectively, when compared to the same periods in 2021.

For the three months ended September 30, 2022 the most significant decrease for the period was a decline of $1.2 million in tax credit amortization.

The decrease resulted from the reversal of $1.4 million amortization expense for one of the Bank’s partnerships due to updated information from the developer, extending the in-service date to 2023.

Also impacting the fluctuations for the three-month period were decreases of $0.4 million for losses on sales and write-downs of OREO, net, $0.4 million in other noninterest expense and $0.2 million in data processing expenses.

These decreases were offset by an increase of $0.7 million in salaries and employee benefits and an increase of $0.2 million in advertising expense.

The losses on sales and write-downs of OREO, net, related to sales and properties under contract during the third quarter of 2022.

The decrease in other noninterest expense of $0.4 million related to a finder’s fee for the sale of two credit relationships in the third quarter of 2021 and the decrease in data processing expense is due to new modules added to our core processor also in the third quarter of 2021.

The increase in salaries and employee benefits primarily relates to a $0.5 million profit sharing adjustment in the third quarter of 2022.

The decrease in noninterest expense for the nine-month period ended September 30, 2022 when compared to the same period in 2021 was primarily driven by a $3.2 million decrease on sales and write-downs of OREO, net.

This nonrecurring write-down of $3.0 million was related to the closing of bank branches in the second quarter of 2021 that were transferred to OREO and marketed for sale.

Another driver of the decrease in noninterest expense for the three-month period ended June 30, 2022 when compared to the prior period in 2021 was the $1.2 million decrease in salaries and employee benefits, which was related to lower medical expenses of $0.8 million and a decrease of $0.4 million related to our retail branch optimization project.

Decreases of $0.2 million in professional and legal fees and $0.2 million in occupancy expense, net, in the three-month period ended June 30, 2022 when compared to the same period also impacted the decline in noninterest expense for the three months ended June 30, 2022 when compared to the same period in 2021.

The decrease in noninterest expense for the six-month period ended June 30, 2022 when compared to the same period in 2021 was primarily driven by a $2.1 million decline in salaries and employee benefits and lower medical expenses and our retail branch optimization project.

Other decreases during the six-months ended June 30, 2022 included a $0.3 million decrease in occupancy expense, net, a $0.3 million decrease in FDIC insurance expense and a $0.2 million decrease in professional and legal fees offset by an increase of $0.4 million in tax credit amortization.

Also impacting the nine-month decrease was a $1.4 million decline in salaries and employee benefits, a $0.8 million in tax credit amortization, a $0.4 million decline in data processing expenses, a $0.3 million decrease in FDIC insurance expense, a $0.3 million in telephone expenses, $0.2 million decrease in occupancy expense, net, and $0.2 million decrease in professional and legal fees.

These various decreases were offset by an increase of $0.3 million in advertising expenses and a $0.2 million increase in other taxes.

The decline in salaries and employee benefits was due to lower medical expenses and our retail branch optimization project offset by the $0.5 million profit sharing adjustment in the third quarter of 2022.

The decrease in tax credit amortization related to the reversal of amortization expense for one of the Bank’s partnerships mentioned above offset by a new historic tax credit that began in early 2022.

The decrease in FDIC expense was due to improved financial metrics of the Bank that are used to perform the assessment.

The increase for the tax credit amortization related to a new historic tax credit that began in early 2022.

Provision for Income Taxes

The provision for income taxes increased $0.9 million and $1.3 million to $1.8 million and $3.1 million for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021.

Pre-tax income increased $6.3 million and $6.6 million for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021.

The effective tax rate was 14.3% and 13.4% for the three and six months ended June 30, 2022, respectively, compared to 14.0% and 10.9% for the same periods in 2021.

The increase in the effective tax rate is primarily due to a higher level of pre-tax income and a lower level of tax-exempt interest income.

The Company ordinarily generates an annual effective tax rate that is less than the statutory rate of 21% due to benefits resulting from tax-exempt interest income, tax credit projects and bank owned life insurance (“BOLI”), which are relatively consistent regardless of the level of pre-tax income.

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

Financial Condition

June 30, 2022

Total assets decreased $10.5 million, to $4.1 billion at June 30, 2022 compared to December 31, 2021.

Federal Reserve Bank excess reserves decreased $149.9 million to $26.3 million at June 30, 2022 from $176.2 million at December 31, 2021 due to redeploying excess cash into higher yielding loans and securities.

Total portfolio loans increased $185.8 million, or 13.3% on an annualized basis, to $3.0 billion at June 30, 2022 compared to $2.8 billion at December 31, 2021 primarily due to higher loan growth in the first half of 2022.

During 2021, loan growth was muted by large commercial loan payoffs and loan sales.

The variances in loan segments for portfolio loans related to increases of $101.3 million in residential mortgages, $65.9 million in commercial real estate loans, $39.8 million in construction loans and $3.4 million in other consumer loans offset by decreases of $15.7 million in the other category and $8.9 million in C&I loans.

Other real estate owned, (“OREO”), decreased $2.5 million at June 30, 2022 compared to December 31, 2021 due to our branch network optimization project that aligns with our strategic goals to enhance franchise value and improve operating efficiency.

Closed retail bank offices have a remaining book value of $1.0 million at June 30, 2022 and December 31, 2021.

The securities portfolio decreased $15.4 million and is currently 22.0% of total assets at June 30, 2022 compared to 22.3% of total assets at December 31, 2021.

The decrease is due to the Company’s strategy of redeploying securities maturities into higher yielding loan growth.

At June 30, 2022, total gross unrealized gains in the available-for-sale portfolio were $0.6 million, offset by $76.5 million of gross unrealized losses.

Refer to the “Securities Activity” section below for further discussion of unrealized losses in the available-for-sale securities portfolio.

The Bank was able to take advantage of increased interest rates available in most bond categories, while keeping its balance of purchasing a mix of both fixed and floating rate instruments.

Total deposits increased $54.9 million to $3.8 billion at June 30, 2022 compared to December 31, 2021.

The increases included $92.6 million in money market accounts, $46.6 million in interest-bearing demand accounts and $43.2 million in savings accounts offset by the intentional decline of $83.9 million in CDs and a decline of $43.6 million in noninterest-bearing demand accounts.

At June 30, 2022, noninterest-bearing deposits comprised 18.8% of total deposits compared to 20.2% at December 31, 2021 and 19.7% at June 30, 2021.

CDs comprised 33.6%, 36.3% and 39.8% of total deposits at June 30, 2022, December 31, 2021 and June 30, 2021, respectively.

Total capital decreased by $73.5 million to $334.1 million at June 30, 2022 compared to $407.6 million at December 31, 2021.

The decrease in equity was primarily due to a $61.7 million, net of tax, decrease in other comprehensive loss due to changes in the fair value of available-for-sale securities, a $32.4 million decrease related to the repurchase of common stock through June 30, 2022, partially offset by net income of $20.1 million for the six months ended June 30, 2022.

The remaining difference of $0.5 million is related to stock-based compensation during the six months ended June 30, 2022.

The ACL was 3.27% of total portfolio loans at June 30, 2022 compared to 3.41% as of December 31, 2021.

General reserves as a percentage of total portfolio loans were 3.15% at June 30, 2022 compared to 3.38% at December 31, 2021.

Management believes, the ACL is adequate to absorb expected losses inherent in the loan portfolio.

The Company remains well capitalized.

Our Tier 1 capital ratio decreased to 12.70% at June 30, 2022 compared to 14.21% at December 31, 2021.

Our leverage ratio was 9.96% at June 30, 2022, compared to 10.62% at December 31, 2021 and total risk-based capital ratio was 13.96% at June 30, 2022 compared to 15.46% at December 31, 2021.The decrease is related to the aforementioned repurchase of common stock of $32.4 million through June 30, 2022.

We adopted CECL effective January 1, 2021 and elected to implement the regulatory agencies’ capital transition relief over the permissible three-year period.

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

Securities Activity

The following table presents the composition of available-for-sale securities:

(Dollars in Thousands) June 30, 2022 December 31, 2021 $ Change

Treasury Securities $ 18,275 $ 4,413 $ 13,862

Government Agency Securities 3,080 3,478 (398)

Residential Mortgage-Backed Securities 110,437 110,013 424

Commercial Mortgage-Backed Securities 40,351 4,168 36,183

Asset Backed Securities 82,433 81,863 570

Collateralized Mortgage Obligations 284,225 287,614 (3,389)

Small Business Administration 53,697 108,914 (55,217)

States and Political Subdivisions 245,105 262,202 (17,097)

Corporate Notes 69,431 59,735 9,696

Total Debt Securities $ 907,034 $ 922,400 $ (15,366)

The Company invests in various securities in order to maintain a source of liquidity, to satisfy various pledging requirements, to increase net interest income and as a tool of the ALCO to diversify and reposition the balance sheet for interest rate risk purposes.

Securities are subject to market risks that could negatively affect the level of liquidity available to us.

Security purchases are subject to our investment policy that is approved annually by our Board and administered through ALCO and our treasury function.

The securities portfolio decreased by $15.4 million to $907.0 million at June 30, 2022 compared to $922.4 million at December 31, 2021.

Securities comprise 22.0% of total assets at June 30, 2022 compared to 22.3% at December 31, 2021.

The decrease is a result of redeploying securities maturities into higher yielding loan growth during the second quarter of 2022.

We have further diversified the securities portfolio as to bond types, maturities and interest rate structures.

As of June 30, 2022, the securities portfolio was comprised of 47.4% variable rate securities with approximately 47.1% that will reprice at least once over the next 12 months.

At June 30, 2022 total gross unrealized gains in the available-for-sale portfolio were $0.6 million, offset by $76.5 million of gross unrealized losses.

At December 31, 2021, total gross unrealized gains in the available-for-sale portfolio were $10.0 million offset by $7.8 million of gross unrealized losses.

The unrealized losses on debt securities were primarily attributable to changes in interest rates, and not related to the credit quality of these securities.

The Company’s investment securities with intermediate and long-term maturities were the largest driver of these gross unrealized losses, as the market values of these securities are significantly impacted by the Treasury yield curve for similar durations (i.e., 5- and 10-year Treasury securities).

This portion of the Treasury yield curve has moved significantly upward over the past six months, driving unrealized losses on these securities higher.

Although the Federal Reserve is in the middle of an aggressive effort to raise short-term interest rates to combat inflation, the Company does not expect higher short-term rates to adversely impact the fair values of the Company’s investment securities to the same extent as increases in longer-term rates.

The Company expects that higher short-term rates may improve yields on certain of the Company’s variable rate securities within the next six to twelve months.

At December 31, 2021, the 5-year and 10-year U.S.

Treasury yields were 1.26% and 1.52%, respectively.

At June 30, 2022, those same bond yields were 3.01% and 2.98%, respectively.

Therefore, this increase of 175 and 146 basis points, respectively in the intermediate part of the yield curve largely caused the reduction in bond prices for fixed rate bonds in that maturity range.

Note, the effects were greater for longer maturity bonds, such as municipal bonds.

On the other hand, floating rate bonds largely held consistent values, as those interest rates adjust in line with Federal Reserve interest rate hikes.

At June 30, 2022 and December 31, 2021, the Company had no credit related net investment impairment losses.

Refer to Note 3, Investment Securities, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information related to our securities.

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

Loan Composition

The following table summarizes our loan portfolio for the periods presented:

(Dollars in Thousands) June 30, 2022 December 31, 2021

Commercial Real Estate $ 1,389,117 $ 1,323,252

Commercial and Industrial 336,477 345,376

Total Commercial Loans 1,725,594 1,668,628

Residential Mortgages 559,313 457,988

Other Consumer 48,033 44,666

Total Consumer Loans 607,346 502,654

Construction 322,731 282,947

Other 342,225 357,900

Total Portfolio Loans 2,997,896 2,812,129

Loans Held-for-Sale — 228

Total Loans $ 2,997,896 $ 2,812,357

Our loan portfolio represents our most significant source of interest income.

The risk that borrowers are unable to pay such obligations is inherent in the loan portfolio.

Other conditions such as downturns in the borrower's industry or the overall economic climate can significantly impact the borrower’s ability to pay.

For a discussion of the risk factors relevant to our business and operations, please refer to Part I, Item 1A, “Risk Factors,” contained in our Annual Report on Form 10-K for the year ended December 31, 2021.

Total portfolio loans increased $185.8 million, or 13.3% on an annualized basis, to $3.0 billion at June 30, 2022 compared to December 31, 2021 with strong production in our commercial real estate, residential mortgage and construction portfolios.

The commercial portfolio is monitored for potential concentrations of credit risk by market, property type and tenant concentrations.

At June 30, 2022, the loan portfolio was comprised of 29.6% floating rates which reprice monthly, 39.5% variable rates that reprice at least once during the life of the loan and the remaining 30.9% are fixed rate loans.

The Company is carefully monitoring the loan portfolio during 2022, including in light of market conditions that impact our borrowers and the interest rate environment.

Our exposure to the hospitality industry at June 30, 2022 equated to approximately $380.2 million, or 12.7% of total portfolio loans.

These were mostly loans secured by upscale or top tier flagged hotels, which have historically exhibited low leverage and strong operating cash flows.

Beginning in the second quarter of 2021, we observed improvements in occupancy and the average daily rates for our hotel clients following sharp declines as a result of the pandemic.

However, our clients continue to face challenges with respect to labor, which we believe impedes their ability to turnover rooms resulting in occupancy constraints.

This has caused, or may cause, them to operate with lower levels of liquidity and an inability to reserve for capital improvements and may adversely affect their ability to pay property expenses, capital improvements and/or repay existing indebtedness.

Contractual payments have been restored since the expiration of our deferral program on June 30, 2021.

These developments, together with the current economic conditions, generally, may adversely impact the value of real estate collateral in hospitality and other commercial real estate exposure.

As a result, our financial condition, capital levels and results of operations could be adversely affected.

Aggregate commitments to our top 10 credit relationships were $686.8 million at June 30, 2022.

The Other segment represents 49.3% of the top 10 credit relationships.

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

The following table summarizes our top 10 relationships and a description of industries represented for the periods presented:

Dollars in Thousands For the Periods Ending Change June 30, 2022 June 30, 2022

June 30, 2022 December 31, 2021 % of Gross Loans % of RBC

Hospitality, agriculture & energy $338,790 $350,010 ($11,220) 11.30 % 73.47 %

Retail real estate & food services 56,492 56,073 419 1.88 % 12.25 %

Industrial & retail real estate 44,503 45,653 (1,150) 1.48 % 9.65 %

Multifamily development 40,000 36,720 3,280 1.33 % 8.68 %

Retail real estate 37,355 38,250 (895) 1.25 % 8.10 %

Hospitality 35,234 35,664 (430) 1.17 % 7.64 %

Multifamily & student housing 34,675 35,405 (730) 1.16 % 7.52 %

Hospitality 34,046 34,463 (417) 1.14 % 7.38 %

Special/limited use 33,736 33,736 — 1.13 % 7.32 %

Multifamily development 31,992 29,389 2,603 1.07 % 6.94 %

Top Ten (10) Relationships 686,823 695,363 (8,540) 22.91 % 148.95 %

Total Gross Loans 2,997,896 2,812,357 185,539

% of Total Gross Loans 22.91 % 24.73 % (1.82) %

Concentration (25% of RBC) $115,277 $120,781

Unfunded commitments on lines of credit were $430.8 million at June 30, 2022 as compared to $433.1 million at December 31, 2021.

The majority of unused commitments are for construction projects that will be drawn as the construction completes.

Total utilization was 53.6% at June 30, 2022 and 52.2% at December 31, 2021.

Unfunded commitments on commercial operating lines of credit was 54.3% at June 30, 2022 and 51.7% at December 31, 2021.

We attempt to limit our exposure to credit risk by diversifying our loan portfolio by segment, geography, collateral and industry while actively managing concentrations.

When concentrations exist in certain segments, this risk is mitigated by reviewing the relevant economic indicators and internal risk rating trends of the loans in these segments.

The Company has specific loan segment limits in its loan policy.

Total commercial real estate balances should not exceed the combination of 300% of total risk-based capital and growth in excess of 50% over the previous thirty-six months and construction loan balances should not exceed 100% of total risk-based capital.

Investment real estate property types and purchased loan programs have individual dollar limits that should not be exceeded in the portfolio.

In addition, there are specific limits in place for various categories of real estate loans with regards to loan-to-value ratios, loan terms, and amortization periods.

We also have policy limits on loan-to-cost for construction projects.

Unsecured loans pose higher risk for the Company due to the lack of a well-defined secondary source of repayment.

Commercial unsecured loans are reserved for the best quality customers with well-established businesses that operate with low financial and operating leverage.

The repayment capacity of the borrower should exceed the policy and guidelines for secured loans.

Deferred costs and fees included in the portfolio balances above were $6.6 million and $4.5 million at June 30, 2022 and December 31, 2021, respectively.

Discounts on purchased 1-4 family loans included in the portfolio balances above were $176.5 thousand and $190.6 thousand at June 30, 2022 and December 31, 2021, respectively.

From time to time, we have mortgage loans held-for-sale derived from two sources.

First, we purchase mortgage loans on a short-term basis from a partner financial institution that have fully executed sales contracts to end investors.

Second, we originate and close mortgages with fully executed contracts with investors to purchase shortly after closing.

We then hold these mortgage loans from both sources until funded by the investor, typically a two-week period.

There were no mortgage loans held-for-sale at June 30, 2022 and $0.2 million at December 31, 2021.

Refer to Note 4, Loans and Loans Held-for-Sale, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information related to our loans.

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

Credit Quality

On a monthly basis, a Criticized Asset Committee meets to review certain special mention and substandard loans within prescribed policy thresholds.

These loans typically represent the highest risk of loss to the Company.

Action plans are established and these loans are monitored through regular contact with the borrower and loan officer, review of current financial information and other documentation, review of all loan or potential loan restructures or modifications and the regular re-evaluation of assets held as collateral.

On a quarterly basis, the Credit Risk Committee of the Board meets to review our loan portfolio metrics, approve segment limits, approve the adequacy of ACL, and findings from Loan Review identified in the previous quarter.

Annually, this same committee approves credit related policies and policy enhancements as they become available.

Additional credit risk management practices include continuous reviews of trends in our lending footprint and our lending policies and procedures to support sound underwriting practices, concentrations, delinquencies and annual portfolio stress testing.

Our Loan Review department serves as a mechanism to individually monitor credit quality and assess the effectiveness of credit risk management practices to provide oversight of all lending activities.

The loan review function has the primary responsibility for assessing commercial credit administration and credit decision functions of consumer and mortgage underwriting, as well as providing input to the loan risk rating process.

Our policy is to place loans in all categories in nonaccrual status when collection of interest or principal is doubtful, or generally when interest or principal payments are 90 days or more past due based on contractual terms.

Consumer unsecured loans and secured loans are evaluated for charge-off after the loan becomes 90 days past due.

Unsecured loans are fully charged-off and secured loans are charged-off to the estimated fair value of the collateral less the cost to sell.

Nonperforming assets consist of nonaccrual loans and OREO.

The following table summarizes nonperforming assets for the dates presented:

(Dollars in Thousands) June 30, 2022 December 31, 2021 $ Change

Nonperforming Loans

Commercial Real Estate $ 3,258 $ 3,337 $ (79)

Commercial and Industrial 5,210 451 4,759

Residential Mortgages 2,555 2,551 4

Other Consumer 6 73 (67)

Construction 1,000 985 15

Total Nonperforming Loans 12,029 7,397 4,632

Other Real Estate Owned 8,432 10,916 (2,484)

Total Nonperforming Assets $ 20,461 $ 18,313 $ 2,148

Nonperforming assets increased $2.1 million to $20.5 million at June 30, 2022 compared to December 31, 2021.

The increase was primarily due to a $4.6 million increase in nonperforming loans due to the deterioration of a purchased syndicated C&I loan totaling $4.9 million, offset by a $2.5 million decrease in OREO.

Closed retail bank offices have a remaining book value of $1.0 million at both June 30, 2022 and December 31, 2021.

During the first quarter of 2022, two branch closures were completed as part of our branch network optimization project that aligns with our strategic goals to enhance franchise value and improve operating efficiency.

In addition, two former closed offices were also moved to OREO.

During the first six months of 2022, a total of four branch offices were sold.

Closed-end installment loans, amortizing loans secured by real estate and any other loans with payments scheduled monthly are reported past due when the borrower is in arrears two or more monthly payments.

Other multi-payment obligations with payments scheduled other than monthly are reported past due when one scheduled payment is due and unpaid for 30 days or more.

We monitor delinquency on a monthly basis, including loans that are at risk for becoming delinquent and early stage delinquencies in order to identify emerging patterns and potential problem loans.

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

Troubled Debt Restructuring Disclosures Prior to Our Adoption of ASU No.

Prior to our adoption of ASU No.

2022-02, we accounted for a Troubled Debt Restructuring (“TDRs”) as a loan that we, for economic or legal reasons related to a borrower’s financial difficulties, granted a concession to the borrower that we would not otherwise grant.

The Company strives to identify borrowers in financial difficulty early and work with them to modify terms and conditions before their loan defaults and/or is transferred to nonaccrual status.

Modified terms that might have been considered a TDR generally included extension of maturity dates at a stated interest rate lower than the current market rate for a new loan with similar characteristics, reductions in contractual interest rates or principal deferment.

While unusual, there may have been instances of principal forgiveness.

Short-term modifications that were considered insignificant were generally not considered a TDR unless there were other concessions granted.

On April 1, 2022, we adopted ASU 2022-02, which eliminated TDR accounting prospectively for all restructurings occurring on or after January 1, 2022.

Refer to Note 1, Basis of Presentation, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information related to ASU No.

Generally, the Company individually evaluates all loans experiencing financial difficulty, with a commitment greater than or equal to $1.0 million for individually evaluated loan reserves.

In addition, the Company may evaluate credits that have complex loan structures for impairment, even if the commitment is less than $1.0 million.

Nonaccrual TDRs can be returned to accruing status if the ultimate collectability of all contractual amounts due, according to the restructured agreement, is not in doubt and there is a period of a minimum of six months of satisfactory payment performance by the borrower either immediately before or after the restructuring.

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

Allowance for Credit Losses

The following is the allocation of the ACL balance by segment for the periods presented:

June 30, 2022 December 31, 2021

(Dollars in Thousands) Amount % of Loans in each Category to Total Portfolio Loans Amount % of Loans in each Category to Total Portfolio Loans

Commercial Real Estate $ 17,808 46.3 % $ 17,297 47.0 %

Commercial & Industrial 5,688 11.2 % 4,111 12.3 %

Residential Mortgages 5,155 18.7 % 4,368 16.3 %

Other Consumer 1,719 1.6 % 1,493 1.6 %

Construction 6,832 10.8 % 6,939 10.1 %

Other 60,779 11.4 % 61,731 12.7 %

Balance End of Year $ 97,981 100.0 % $ 95,939 100.0 %

The following table summarizes the credit quality ratios and their components as of June 30, 2022 and December 31, 2021:

(Dollars in Thousands) June 30, 2022 December 31, 2021

Allowance for Credit Losses to Total Portfolio Loans

Allowance for Credit Losses $ 97,981 $ 95,939

Total Portfolio Loans 2,997,896 2,812,129

Allowance for Credit Losses to Total Portfolio Loans 3.27 % 3.41 %

Nonperforming Loans to Total Portfolio Loans

Nonperforming Loans $ 12,029 $ 7,397

Total Portfolio Loans 2,997,896 2,812,129

Nonperforming Loans to Total Portfolio Loans 0.40 % 0.26 %

Allowance for Credit Losses to Nonperforming Loans

Allowance for Credit Losses $ 97,981 $ 95,939

Nonperforming Loans 12,029 7,397

Allowance for Credit Losses to Nonperforming Loans 814.54 % 1,297.00 %

Net Charge-offs to Average Portfolio Loans

Net Charge-offs (annualized) $ 811 $ 23,127

Average Total Portfolio Loans 2,911,872 2,927,083

Net Charge-offs to Average Portfolio Loans 0.03 % 0.79 %

See the Credit Quality and Allowance for Credit Losses sections within this MD&A for an analysis of the factors that drove the changes in the ACL ratios presented in the table above.

The net charge-offs of $23.1 million for the full year 2021 was primarily attributable to the resolution of five problem relationships during 2021, in which the majority of losses were anticipated and previously reserved.

The provision for credit losses, which includes a provision for losses on loans and on unfunded commitments, is a charge to earnings to maintain the ACL at a level consistent with management's assessment of expected losses in the loan portfolio at the balance sheet date.

The provision for unfunded commitments increased $0.9 million for both the three and six months ended June 30, 2022 when compared to the same periods in 2021 due to increased commitment volume in construction offset by the reserve rates.

Net charge-offs were $0.2 million and $0.4 million for the three and six months ended June 30, 2022, respectively, when compared to the same periods in 2021.

During the three months ended June 30, 2021, we recognized charge-offs of $8.2 million related to the resolution of our two largest nonperforming credits.

As a percentage of average total portfolio loans, on an

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

annualized basis, net charge-offs were 0.03% for both the three and six months ended June 30, 2022 compared to 1.15% and 0.63% for the same periods in 2021.

At June 30, 2022, nonperforming loans increased $4.6 million, or 62.6%, to $12.0 million since December 31, 2021.

Nonperforming loans as a percentage of total portfolio loans were 0.40% and 0.26% as of June 30, 2022 and December 31, 2021, respectively.

The ACL was 3.27% of total portfolio loans at June 30, 2022, compared to 3.41% of total portfolio loans, at December 31, 2021.

The following tables represent credit exposures by internally assigned risk ratings as of the periods presented:

June 30, 2022

(Dollars in Thousands) Commercial Real Estate Commercial and Industrial Residential Mortgage Other Consumer Construction Other Total Portfolio Loans

Pass $ 1,372,820 $ 328,459 $ 555,030 $ 47,964 $ 321,548 $ 180,792 $ 2,806,613

Special Mention 12,961 — 970 — 73 3,185 17,189

Substandard 3,336 8,018 3,313 69 1,110 158,248 174,094

Doubtful — — — — — — —

Loss — — — — — — —

Total Portfolio Loans $ 1,389,117 $ 336,477 $ 559,313 $ 48,033 $ 322,731 $ 342,225 $ 2,997,896

Performing $ 1,385,859 $ 331,267 $ 556,758 $ 48,027 $ 321,731 $ 342,225 $ 2,985,867

Nonperforming 3,258 5,210 2,555 6 1,000 — 12,029

Total Portfolio Loans $ 1,389,117 $ 336,477 $ 559,313 $ 48,033 $ 322,731 $ 342,225 $ 2,997,896

December 31, 2021

(Dollars in Thousands) Commercial Real Estate Commercial and Industrial Residential Mortgage Other Consumer Construction Other Total Portfolio Loans

Pass $ 1,314,576 $ 337,294 $ 453,894 $ 44,554 $ 281,241 $ 185,247 $ 2,616,806

Special Mention 5,260 8 553 — 604 3,281 9,706

Substandard 3,416 8,074 3,541 112 1,102 169,372 185,617

Doubtful — — — — — — —

Loss — — — — — — —

Total Portfolio Loans $ 1,323,252 $ 345,376 $ 457,988 $ 44,666 $ 282,947 $ 357,900 $ 2,812,129

Performing $ 1,319,915 $ 344,925 $ 455,437 $ 44,593 $ 281,962 $ 357,900 $ 2,804,732

Nonperforming 3,337 451 2,551 73 985 — 7,397

Total Portfolio Loans $ 1,323,252 $ 345,376 $ 457,988 $ 44,666 $ 282,947 $ 357,900 $ 2,812,129

Special mention, substandard and doubtful loans at June 30, 2022 decreased $4.0 million to $191.3 million compared to $195.3 million at December 31, 2021.

The increase in special mention related to one large CRE loan that downgraded from pass and the decrease in substandard loans related to paydowns in the other loan category during the second quarter of 2022.

Additionally, refer to Note 5, Allowance for Credit Losses, in the Notes to Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q for additional information related to the ACL.

CARTER BANKSHARES, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)

The following table presents the composition of deposits for the periods presented:

(Dollars in Thousands) June 30,

2022 December 31,

2021 $ Change % Change

Noninterest-Bearing Demand $ 704,323 $ 747,909 $ (43,586) (5.8) %

Interest-Bearing Demand 499,282 452,644 46,638 10.3 %

Money Market 555,621 463,056 92,565 20.0 %

Savings 733,704 690,549 43,155 6.2 %

Certificate of Deposits 1,260,463 1,344,318 (83,855) (6.2) %

Total Deposits $ 3,753,393 $ 3,698,476 $ 54,917 1.5 %

Deposits are our primary source of funds.

We believe that our deposit base is stable and that we have the ability to attract new depositors while diversifying the deposit composition.

Total deposits at June 30, 2022 increased $54.9 million, or 1.5%, from December 31, 2021.

The increase in deposits primarily related to an increase in our core deposits of $138.8 million, or 11.9% on an annualized basis.

Our core deposits include noninterest-bearing demand accounts, interest-bearing demand deposits, money market accounts and savings accounts.

The decrease of $83.9 million, or 6.2% in CDs at June 30, 2022 compared to December 31, 2021 is due to the intentional runoff of higher cost CDs.

Noninterest-bearing deposits comprised 18.8% and 20.2% of total deposits at June 30, 2022 and December 31, 2021, respectively.

The following table presents additional information in relation to deposits:

(Dollars in Thousands) June 30,

2022 December 31,

Deposits from the Certificate of Deposit Account Registry Services (CDARS) $ 922 $ 139

Noninterest-Bearing Public Funds Deposits 24,129 58,393

Interest-Bearing Public Funds Deposits 165,808 123,968

Total Deposits not Covered by Deposit Insurance (1)

426,331 396,626

Certificates of Deposits not Covered by Deposit Insurance 137,350 147,134

Deposits for Certain Directors, Executive Officers and their Affiliates 2,866 3,032

(1) These deposits are presented on an estimated basis.

This estimate was determined based on the same methodologies and assumptions used for regulatory reporting requirements.

Maturities of CDs over $250,000 or more not covered by deposit insurance at June 30, 2022 are summarized as follows:

(Dollars in Thousands) Amount Percent

Three Months or Less $ 11,961 8.7 %

Over Three Months Through Twelve Months 57,332 41.7 %

Over Twelve Months Through Three Years 44,452 32.4 %

Over Three Years 23,605 17.2 %

Total $ 137,350 100.0 %

CARTER BANKSHARES, INC.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements